[Q&A] Bank of Korea: "Seoul Metropolitan Housing Prices Rising Again, Household Debt Growth May Accelerate"

Q&A on the March Financial Stability Situation Press Briefing

Lee Jongryeol, Deputy Governor of the Bank of Korea, stated on the 26th, "Recently, housing prices in some areas of Seoul and the greater metropolitan area have started to rise rapidly again, and this trend appears to be spreading to other regions." He added, "We need to pay close attention to the possibility that the previously stable growth in household debt could once again accelerate."

Lee Jongryul, Deputy Governor of the Bank of Korea, is speaking at the Financial Stability Situation (March 2025) briefing held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 27th. Provided by the Bank of Korea.

Deputy Governor Lee made these remarks during a press briefing for the 'Financial Stability Situation Report' held that day.

Regarding the increase in housing prices following the lifting of the land transaction permit zones (Toheoje) in Seoul's Gangnam area, he commented, "While prices did rise after the Toheoje was lifted, it is difficult to attribute the increase solely to that. Multiple factors seem to be at play, including the resumption of mortgage lending by banks at the beginning of the year and the easing of financial conditions."

On the polarization of housing prices between Seoul and the greater metropolitan area versus regional cities, Deputy Governor Lee noted, "If the downturn in regional real estate continues, the risk of insolvency could increase for related project financing (PF) sites, construction companies, and high-risk households. Should internal or external shocks occur, and if vulnerabilities in these sectors worsen, there are concerns that the soundness of financial institutions could also deteriorate."

The following is a Q&A with Deputy Governor Lee, Director of the Financial Stability Bureau Jang Jungsu, and others.

- On March 19, the Seoul Metropolitan Government reinstated the Toheoje. What impact do you foresee this having on household debt and related issues?

▲ While the market suggests that housing transactions have slowed and stabilized since the expanded reinstatement, it is still too early to obtain precise data. Although housing prices did rise after the Toheoje was lifted, this also appears to be due to multiple factors, such as the resumption of mortgage lending by banks at the beginning of the year and the easing of financial conditions. The effects of the expanded designation will only be analyzable once more data becomes available.

- What was the trend between the lifting and reinstatement of the Toheoje? How much do you expect household debt to increase in March and April compared to February?

▲ There is a time lag between housing transactions and household debt. Housing transactions must be reported within a month, so there is an inherent delay. The impact on household debt typically appears a month or two after that. We expect to see the effect of increased housing transactions on household debt more clearly in March and April.

- The report contains seemingly contradictory points: concerns about the spread of rising Gangnam housing prices to surrounding areas and the possibility that falling home prices could increase the number of high-risk households. Could you elaborate?

▲ Recently, there has been a clear differentiation between the real estate markets in the greater Seoul area and the regions. Both Seoul and the regions have significant real estate exposure, but risks of insolvency have recently increased in the regions due to continued sluggishness. Our analysis shows that the regions, overall, have a high proportion of high-risk households, particularly among the elderly. If home prices fall, the impact could be more severe for these groups, which is why we emphasized the importance of managing the soundness of non-bank financial institutions with significant exposure to them.

▲ In contrast, while housing prices in parts of Seoul have risen rapidly, our greater concern is the potential for this trend to spread to surrounding areas. In Korea, there is a strong correlation between housing prices and household debt, so we are also concerned about the possibility of another round of household debt accumulation.

- In what sense has the number of high-risk households with household debt increased?

▲ In terms of the number of households, the proportion of financial debt decreased somewhat last year compared to 2023, but it still remains high relative to the long-term average, so caution is warranted. Furthermore, if we estimate the situation from the end of 2024 through this year, reflecting interest rate cuts and real estate price movements, the regions have seen falling real estate prices, which increases the debt repayment burden from an asset perspective, thus leading to a continued increase in high-risk households.

▲ However, overall, because interest rates have been lowered, the interest burden for debt repayment has decreased, so there has not been a sharp increase in high-risk households.

- Some analysts say the current situation is similar to last summer, when the second phase of the stress DSR was postponed and the Bank of Korea was considering lowering the base rate. Do you agree that the situation is similar now?

▲ Household debt remains the most important issue for the Bank of Korea, so we need to closely monitor how things develop. The Monetary Policy Board considers not only financial stability but also growth and inflation, so it will make decisions based on a comprehensive assessment.

▲ The government and the Bank of Korea remain committed to managing household debt within GDP. What has changed between last year and this year is that, from the Bank of Korea's perspective, the policy rate is now lower. Since August last year, the base rate has been cut three times. There is a nonlinear relationship between interest rates and household debt, meaning that as rates fall, household debt can increase more rapidly. Both the Bank of Korea and the government are aware of this. That is why, when announcing household debt management measures earlier this year, we prepared steps such as lowering the guarantee ratio for jeonse loans and managing policy finance to strengthen macroeconomic stability, and we plan to implement additional measures as needed.

On the morning of the 27th, a Financial Stability Status (March 2025) briefing was held at the Bank of Korea in Jung-gu, Seoul. (From left) Jonghan Lee, Head of Financial Institution Analysis Department; Kwanggyu Lim, Head of Financial Stability Planning Department; Jongryul Lee, Deputy Governor; Jungsu Jang, Director of Financial Stability Bureau; Jeongho Kim, Head of Stability Management Team. Provided by the Bank of Korea

- The report mentions concerns about the impact of lower interest rates on household debt. Does this mean the Bank of Korea's monetary policy could shift to focus more on managing household debt?

▲ Monetary policy takes into account not only macroeconomic factors such as growth and inflation, but also financial stability issues like household debt and exchange rates. Nevertheless, the lower the interest rate, the greater the potential impact on household debt. However, if macroprudential policies are implemented in tandem, their effect can be mitigated. Given these considerations, I want to emphasize that policy coordination between monetary policy and macroprudential management is extremely important at this time.

- The number of vulnerable self-employed borrowers is rising. What is your outlook on this?

▲ Because the current policy direction is to maintain lower interest rates, the debt repayment burden for self-employed borrowers is expected to decrease. Conditions are being created for delinquency rates among the self-employed to fall, but a sustained improvement in income and business conditions is necessary for delinquency rates to reach desirable or noticeably lower levels.

- What is the Bank of Korea's view on the equity-type mortgage proposed by Financial Services Commission Chairman Kim Byunghwan?

▲ In December last year, we proposed the Korean-style New REITs in our structural reform report. We presented the idea that a fundamental institutional improvement is needed to allow people to purchase homes through equity participation, thereby reducing household debt. The Financial Services Commission is exploring ways to commercialize such ideas, including converting debt into equity. There have been similar cases in the past, but the system should be designed to address previous shortcomings and ensure long-term housing supply from the perspective of consumers. The Bank of Korea will also continue to consider this issue.

- The proportion of vulnerable companies is rising. What is your outlook?

▲ In a low-growth environment, financial institutions are likely to pay closer attention to credit risk management. As a result, funding for vulnerable sectors may become more difficult. If the exchange rate remains high and financial institutions' losses related to delinquencies or insolvencies increase, lending to companies with high credit risk and high risk weights is likely to become more conservative. Nevertheless, the overall corporate loan growth rate remains around 3%.

▲ It is true that the number of vulnerable companies is increasing, especially among small and medium-sized enterprises, which are experiencing operational difficulties and slower recovery of repayment capacity. If corporate credit risk increases in the future, banks will inevitably tighten their lending standards. While this could lead to a reduction in corporate lending, loans to the real estate sector remain at a high level. It seems necessary to guide lending so that funds flow into productive uses and to manage loans flexibly by sector to avoid excessive concentration in real estate. Since corporate loans include loans to the self-employed, support and restructuring should be pursued in parallel to address difficulties faced by self-employed borrowers.