[Inside Chodong] Why the Surge in Housing Prices Is Alarming

Changhwan Lee, Deputy Head of Economic and Financial Department

Seoul's decision to lift the Land Transaction Permission System (LTPS) has led to a sharp rise in housing prices across the city. Since the LTPS was lifted last month, apartment sale prices in the three Gangnam districts (Gangnam, Seocho, and Songpa) have soared to their highest levels in seven years, since the real estate boom of 2018. This upward trend in housing prices is spreading beyond the three Gangnam districts to other parts of Seoul, such as Mapo, Yongsan, and Seongdong (collectively known as Mayongseong), as well as Nowon, Dobong, and Gangbuk (Nodogang), and Geumcheon, Gwanak, and Guro (Geumgwanggu).

How does the government view the rise in Seoul's housing prices? Within the government, many believe that localized increases in housing prices are not a significant problem. The prevailing view is that there is nothing wrong with wealthy individuals purchasing homes within their means, without taking on excessive debt.

However, there is considerable concern about the growing number of people taking on excessive debt to buy homes despite lacking sufficient financial resources. The government is particularly wary of individuals borrowing beyond their means and banks lending excessively relative to borrowers' repayment abilities. While some politicians and government departments see boosting the real estate market as a way to revive the sluggish economy, this perspective has not gained widespread support. This is because excessive capital flowing into real estate can prevent funds from reaching industries or capital markets, leading to side effects such as economic polarization, intergenerational poverty, and frustration among young people.

The government's greater concern is that rising housing prices could fuel an increase in household debt. South Korea's household debt already exceeds 90% of its gross domestic product (GDP), ranking among the highest in the world. Although the ratio once surpassed 100%, it has been gradually declining. Nevertheless, there are growing worries that the recent surge in housing prices could push the household debt ratio back up. In fact, household loans from financial institutions increased by 4.3 trillion won last month compared to the previous month, marking the largest monthly increase in three months.

Excessive household debt can lead to several negative consequences, including sluggish consumption, increased volatility in financial markets, and challenges for monetary policy. Households with high debt have less disposable income for consumption due to interest payments. Last year, domestic retail sales fell by 2.2% compared to the previous year, marking the steepest decline in 21 years since 2003 (-3.2%). Weak consumption restricts economic growth. Additionally, when internal or external economic shocks such as a financial crisis occur, households with excessive debt are more likely to default, which can undermine the soundness of financial institutions. An increase in household debt also risks trapping the Bank of Korea in a monetary policy dilemma, making it difficult to lower the base interest rate during economic downturns.

However, some believe that the rise in housing prices in Seoul due to the lifting of the LTPS is unlikely to spread nationwide. Unlike Seoul, regional real estate markets are experiencing high levels of unsold homes and weaker economic conditions. There are also institutional safeguards, such as the third-phase Stress DSR (Debt Service Ratio), which is set to take effect in July. Financial authorities are closely monitoring household loan trends in areas where housing prices have surged, such as Gangnam and Mayongseong, and have stated that they will respond immediately if lending increases excessively. The Seoul Metropolitan Government, which has faced criticism for triggering market instability by easing regulations without sufficient consideration, has recently deployed on-site inspection teams to crack down on real estate speculation. Nevertheless, the government needs to take a more proactive and aggressive approach to management to prevent the mistaken belief from spreading in the market that "it's necessary to take on excessive debt and jump on the real estate bandwagon before it's too late."