Concerns Realized After Six Months... Soaring Seoul Home Prices Revive Moon-Era Policies [Major Shift Toward Productive Finance] ①

"Korea's Real Estate Credit Concentration Problem Can No Longer Be Ignored"
Productive Finance Means Channeling Money into Productive Sectors
150 Trillion Won National Growth Fund with Financial Sector Participation to Support Economic Growth

Editor's NotePublic dissatisfaction is mounting due to the sharp rise in real estate prices. While incomes remain stagnant, housing prices have soared, significantly undermining residential stability. The root cause of this instability in the real estate market is widely seen as the excessive real estate financing by the financial sector. Critics argue that financial institutions are not supplying funds to productive sectors such as businesses or advanced industries, but are instead focusing on non-productive areas like real estate-backed loans. This has resulted in an oversupply of credit in the market, fueling further increases in real estate prices. The Lee Jaemyung administration has made a "major shift toward productive finance" a core economic policy goal in response to this issue. Overseas, following the 2008 global financial crisis, financial institutions have reflected on their practices and are moving toward productive finance. In Korea as well, there is growing consensus that for productive finance to take root, policy support from the government and political circles, as well as a shift in mindset among financial companies, are all essential.

#Due to real estate issues, it has become difficult to implement effective monetary policy. We must break the vicious cycle between real estate and household debt. (Lee Changyong, Governor of the Bank of Korea)

#Banks must move away from a business model focused on real estate and shift toward long-term investment in innovative ventures, leveraging their evaluation capabilities. (Lee Bokhyun, former Governor of the Financial Supervisory Service)

Last April, Lee Changyong, Governor of the Bank of Korea, Kim Byunghwan, former Chairman of the Financial Services Commission, and Lee Bokhyun, former Governor of the Financial Supervisory Service, held a public discussion at the Bankers' Hall in Jung-gu, Seoul.

The topic was the issue of real estate credit concentration in Korea and possible solutions. It was highly unusual for the heads of Korea's financial policy authorities to gather in one place for a public discussion on a single topic.

Real Estate-Centric Credit Structure Hits Its Limits

They unanimously emphasized, "The concentration of real estate credit in Korea's financial market is at a critical level and must be addressed." While financial institutions have pursued profits by focusing on real estate loans, this has exacerbated social problems such as a surge in household debt, rising home prices, and growing inequality, without contributing to the qualitative growth of the economy.

They warned that if this problem is not resolved, the vicious cycle will repeat itself. Six months later, as of the article's publication date, real estate prices have soared, particularly in Seoul and the greater metropolitan area, confirming the concerns of these economic leaders.

Lee Changyong, Governor of the Bank of Korea (right), and Lee Bokhyun, Governor of the Financial Supervisory Service, are attending the 'Real Estate Credit Concentration: Current Status, Issues, and Improvement Measures' conference held on April 3 at the Bankers' Hall in Jung-gu, Seoul, engaging in conversation. Photo by Jo Yongjun

The Lee Jaemyung administration, recognizing these issues, has begun a fundamental overhaul of the financial market structure. The core policy direction presented by the government is "productive finance."

Productive finance is a policy that aims to redirect Korea's financial industry, which has been heavily concentrated in non-productive sectors such as household debt and real estate, back to its essential role: supporting corporate innovation, investment in new industries, and restructuring. First introduced during the Moon Jaein administration in 2017, the policy has been revived and further developed under the Lee Jaemyung administration.

Kim Yongbeom, Chief Policy Officer at the Presidential Office, previously explained that the "productive finance" policy was introduced during his tenure as Vice Chairman of the Financial Services Commission in 2017, prompted by a reflection on whether finance was fulfilling its essential role.

Kim emphasized, "The core function of finance in a capitalist economy is to ensure that limited funds flow to where they are most needed through selective allocation. If finance supplies funds in a timely manner to enable the execution of creative ideas, it can serve as a catalyst for the emergence of innovative companies."

Ensuring Money Flows to Productive Sectors

Raghuram Rajan, Professor at the University of Chicago and former Governor of the Reserve Bank of India, pointed out, "As finance focuses on leverage creation and short-term trading, new ideas are failing to be commercialized. The biggest culprits undermining the dynamism of capitalism are large financial institutions and their executives."

Adair Turner, former Chairman of the UK's Financial Services Authority during the 2008 global financial crisis, argued in his book "Between Debt Deluge and the Devil's Temptation" that "without proper regulation, markets inevitably create excessive money, which is then used to trade existing assets like real estate rather than being directed to new areas."

He emphasized, "When excessive debt generated by finance flows into non-productive areas such as real estate speculation, it harms the economy. Institutional mechanisms must be established to ensure that funds flow into productive sectors such as manufacturing and services, rather than just financial product trading."

There is growing criticism in Korea as well that finance is excessively concentrated on real estate, the Seoul metropolitan area, deposits, and loans, failing to support sustainable economic growth. According to the Financial Services Commission, as of last year, 64% of Korean household assets were in real estate, far exceeding the OECD average of 52.9%.

Last year, financial sector funding supplied to the domestic real estate sector reached approximately 4,137 trillion won, with its share of GDP increasing 1.5 times over the past nine years. The outstanding balance of real estate-related loans in the banking sector rose from 1,167 trillion won at the end of 2019 to 1,674 trillion won at the end of 2024. The proportion of real estate loans in total bank lending also steadily increased from 66.6% in 2020 to 69.6% in 2024. While financial companies secured stable profits through real estate-backed loans, this resulted in a weakening of economic growth engines, widening disparities between local and metropolitan areas, and deterioration in household consumption, further harming the livelihoods of ordinary citizens.

In a report published last year, the Bank for International Settlements (BIS) warned, "In Korea, financial resources are excessively concentrated in the low-productivity real estate sector, to the point of hindering economic growth." The BIS explained that when private sector credit exceeds a certain level, its selective function for productive sectors weakens, and the negative effects on growth outweigh the positive ones.

In particular, the BIS pointed out that as the share of real estate loans within private sector credit rises, productivity slows, singling out Korea and China in Asia as facing these negative conditions. As of the end of the first quarter of this year, Korea's ratio of private sector credit to GDP stood at 200.7% (BIS standard), far surpassing the appropriate level of 100%. Some analyses suggest that this is comparable to the level seen in Japan just before its real estate bubble burst.

Choi Yonghoon, Director General of the Financial Markets Department at the Bank of Korea, noted, "As limited financial resources are excessively concentrated in real estate, which has low capital productivity, their contribution to economic growth is weakening. This is also undermining both financial stability and the competitiveness of the financial industry."

150 Trillion Won National Growth Fund for Productive Investment

With the real estate-centric financial structure holding back the Korean economy, the government has finally embarked on a full-scale shift toward "productive finance." The Lee Jaemyung administration is pursuing structural transformation centered on three pillars: policy finance, financial institutions, and capital markets.

In the policy finance sector, a 150 trillion won National Growth Fund is being established to support the growth of advanced companies. In the financial institution sector, the government is working to improve systems so that banks, insurance companies, and securities firms can allocate more funds to productive sectors. In the capital markets sector, the government is strengthening the supply of venture capital, cracking down on unfair trading, and working to restore market trust by enhancing the rights of general shareholders.

At the "Major Shift Toward Productive Finance" meeting held on the 19th of last month, Lee Eogweon, Chairman of the Financial Services Commission, diagnosed, "Korea's potential growth rate has dropped to the 1% range, and growth engines are weakening. Intensifying global competition and worsening trade conditions are eroding the competitiveness of key industries and causing regional economic stagnation, deepening polarization and increasing difficulties for vulnerable groups."

He continued, "Even in this situation, Korea's financial sector is still criticized for relying on easy interest income from collateralized loans. It is time for finance, which serves as the compass for the national economy, to solve the problems we face, lead growth, and create a new future for the Korean economy."