[BOK Focus] Seoul Housing Prices Rise, Does Busan Household Debt Also Increase?…Mortgage Loans Shaking Regional Economies

Increase in Private Credit in Seoul Raises House Prices in the Capital Area
Busan Also Sees Rising Debt and House Prices... Synchronization Intensifies
Seoul's Debt and Housing Price Instability Negatively Impact Regional Economy
"Policy Efforts Needed to Curb Private Credit"

Analysis suggests that if real estate prices in Seoul rise and household debt such as mortgage loans increase excessively, it could negatively affect household debt and growth rates in Busan as well. Amid growing concerns over the high ratio of household debt to gross domestic product (GDP) in South Korea, there are indications that instability in Seoul's household debt could have adverse ripple effects on regional economies.

The Busan branch of the Bank of Korea recently presented this analysis in its report titled "Characteristics of Private Credit in the Busan Region and Future Risk Assessment" (by Manager Park Seung-moon, Researcher Jeon Eun-kyung, and Intern Cheon Ji-hyun). According to the report, private credit has been increasing again recently as expectations of a decline in housing prices centered on Seoul have diminished, raising concerns about household debt risks at the regional level.

If Seoul's Household Debt Increases... Busan's Debt Also Rises and Housing Prices Go Up

Because South Korea's real estate market is highly polarized between the Seoul metropolitan area and other regions, housing prices and household debt ratios tend to rise mainly in Seoul and the metropolitan area unless there is a nationwide housing price surge like in 2020-2021. However, the Bank of Korea explained that the negative ripple effects caused by rising housing prices and debt in Seoul do not remain confined to Seoul but can manifest in regions like Busan as housing price increases and growth rate declines.

In fact, the Bank of Korea's model analysis of the impact of credit growth in Seoul on regional credit showed that Busan's household credit is more significantly influenced by increases in Seoul's private and household credit compared to other regions. When Seoul's household debt begins to rise, Busan's household debt also increases for a considerable period from the initial stage. In particular, as Seoul's private credit expands and housing prices in the metropolitan area rise, Busan's housing prices increase at nearly the same magnitude and speed.

The Bank of Korea report attributes this to a "transmission effect" through the real estate markets of Seoul and Busan.

First, when credit growth in Seoul drives up real estate prices in the metropolitan area, more residents of Busan invest there, which can raise Busan's household credit. Metropolitan area real estate has high investment value nationwide, making this possible. Additionally, since Busan is perceived as an alternative investment destination to Seoul, Seoul's credit expansion drives up Busan's real estate prices, which in turn expands Busan's household credit alongside housing prices.

Moreover, the Bank of Korea explained that even without direct external investment in Busan real estate, Seoul's credit expansion and rising real estate prices can raise expectations of housing price increases in Busan, potentially expanding Busan's credit.

If Household Debt Ratio Rises Further, Growth Rate Will Be Negatively Affected

The problem is that when regional debt increases like this, there is little positive effect on the real economy, and the side effect of pushing housing prices higher is significant. The report estimates that "a large portion of private credit, which includes household credit, flows more into the real estate market than into actual economic activities." This means that the increase in Seoul's household debt only raises Busan's housing prices and household debt ratio, contributing little to local production.

On the contrary, an increase in Busan's private credit is likely to have a negative impact on the regional economy. As of the second quarter of this year, Busan's ratio of private credit to gross regional domestic product (GRDP) stands at 207%, ranking third nationwide after Seoul and Daegu. While the national average rose from 88.7% at the end of 2005 to 155.3% in the second quarter of this year, Busan's ratio nearly doubled from 106.7% to 207.2%.

The report stated, "Long-accumulated credit can trigger economic recessions like the global financial crisis or amplify the downturn during economic slowdowns," adding, "If the increase in Busan's private credit relative to GRDP rises by 10 percentage points more than the current level, the growth rate of the bottom 5% group is projected to decrease by 1.5 percentage points over the next three years."

Seoul's Credit Expansion Negatively Impacts Regional Economy... "Efforts to Restrain Needed"

Bank of Korea Governor Lee Chang-yong has previously pointed out several times that "an increase in household debt not only undermines financial market stability but can also weaken South Korea's long-term growth potential."

Excessive credit levels increase household interest repayment burdens, which suppress consumption and negatively affect the economy in the medium to long term. Moreover, in the current environment of high U.S. interest rates and inflation, such burdens reduce the ability to repay interest and resilience to shocks, potentially having a greater impact on the real economy.

This report is significant in that it analyzes how rising housing prices and household debt in Seoul can adversely affect not only the metropolitan area but also regional economies like Busan. The report emphasizes, "To prevent nationwide credit expansion from negatively impacting regional economies, close monitoring of Busan's credit situation and policy efforts to curb excessive private credit growth are necessary."