Burden of Real Estate Overheating and Rapid Household Debt Increase
Concerns Over Widening Interest Rate Gap with the United States
As the Bank of Korea's Monetary Policy Committee (MPC) prepares to decide on the base interest rate on the 22nd, the market is leaning towards the possibility of a rate freeze. The recent surge in housing prices, the increase in household debt, and volatility in the won-dollar exchange rate?referred to as the 'three major variables'?are expected to act as constraints against a rate cut.
Experts predict that the Bank of Korea will maintain the current 3.50% base rate, marking the 12th consecutive freeze. Despite price stabilization and concerns over economic sluggishness, the recent overheating of the real estate market and the rapid rise in household debt are seen as obstacles to lowering interest rates. From the perspective of inflation and the economy alone, lowering the base rate would be appropriate, but with household debt surging and housing prices rising, the Bank of Korea faces a burden in cutting rates.
Particularly, recent trends in the real estate market are drawing attention. After a correction phase since September last year, the housing market shifted back to an upward trend starting in April this year. This is interpreted as a result of the government's easing of real estate regulations combined with the possibility of interest rate cuts.
The increase in household debt is also significant. According to the Bank of Korea, from April to July this year, household loans from banks increased by more than 5 trillion won each month. Notably, policy mortgages such as Didimdol loans and Buteemok loans account for 60% of the increase in housing mortgage loans, leading to criticism that government policies are unintentionally fueling the rise in household debt.
![Expected BoK Base Rate Hold...Housing Prices, Household Debt, and Exchange Rates as the '3 Major Variables' [AK Radio]](https://cphoto.asiae.co.kr/listimglink/1/2024080108394271729_1722469182.jpg)
Accordingly, financial authorities have recently stepped up household loan management. The Financial Services Commission plans to strengthen the Debt Service Ratio (DSR) regulations starting in September, applying higher stress interest rates in the metropolitan area compared to non-metropolitan regions.
The exchange rate is also considered a key factor in the interest rate decision. Recently, the won-dollar exchange rate has been declining due to expectations of a rate cut in the United States. However, with the interest rate gap between Korea and the U.S. reaching about 2 percentage points, there are concerns that if Korea cuts rates first, it could put upward pressure on the exchange rate.
The stance of the U.S. Federal Reserve (Fed) is also being closely watched. The market widely expects the Fed to cut the base rate at the Federal Open Market Committee (FOMC) meeting in September. Consequently, there is speculation that the Bank of Korea might consider lowering rates after October.
However, some suggest that the Bank of Korea might proactively cut rates ahead of the U.S. due to increasing downward pressure on the economy from domestic demand weakness and export slowdown, arguing for a more aggressive monetary policy.
Meanwhile, the expansion of banks' interest rate margins is also causing controversy. Recently, banks have been raising loan interest rates while lowering deposit rates, sparking accusations of 'excessive profits.' Banks explain this as a response to financial authorities' demands to curb household loans. This is cited by some as a downside of 'government-controlled finance.'
As attention focuses on the upcoming MPC decision, active analysis is underway regarding the impact of the Bank of Korea's choice on the economy and financial markets. Experts expect the Bank of Korea to make a cautious decision amid the complex challenges of price stability, economic recovery, and financial stability.
Ultimately, the likelihood of a rate freeze at this MPC meeting appears high. However, the possibility remains open to adjust the timing of a rate cut depending on future economic conditions and external factors. Market participants are expected to closely watch the Bank of Korea's decision along with signals about the future direction of monetary policy.
A financial sector official said, "More important than the immediate rate decision is the Bank of Korea's stance on the future direction of monetary policy. In particular, how they evaluate and respond to the interest rate gap with the U.S., real estate market trends, and the rise in household debt will be crucial."
This MPC decision is expected to be a significant event affecting the overall domestic economy. Since interest rate trends broadly influence everything from individual financial strategies to corporate investment decisions and the national economy, market participants need to monitor closely.
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