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Finance minister warns of 'excessive leverage'
Deputy Prime Minister and Finance Minister Hong Nam-ki, second from right, speaks at a meeting at the Seoul Government Complex, Wednesday. Yonhap
By Lee Kyung-min
By Lee Kyung-min
Sharp rises in housing prices despite an overall decline in household incomes and excessive debt are two major downside risks to home values, creating a major downside risk to housing prices in the future, the country's top policymaker said Wednesday.
The comments came in response to the continued “panic-driven” demand for leveraged investments in the real estate market, where most “cheap loans” have ended up amid a record-low central bank rate put in place to weather the pandemic-induced economic crisis.
“Although the recent housing market instability is in part explained by a supply and demand factor, the volume of occupancy remains average and demand continues for apartments in redevelopment zones in Seoul including southern areas. Prices will also drop sharply in the second half of the year,” Deputy Prime Minister and Finance Minister Hong Nam-ki said at a meeting of economy-related ministers at the Seoul Government Complex.
The excessive amount of liquidity in the market will shrink, given the recent rise in mortgage rates and macro-prudential measures including the expansion of the debt service ratio (DSR) set to take effect July 1. Also factored in will be the Bank of Korea's possible base rate hike this year, he added.
“We ask that housing market participants make decisions with accurate information and reasonable judgment rather than excessive expectations, anxiety, and chasing purchases at excessively high prices," he stressed.
The real estate markets in Seoul, the surrounding Gyeonggi Province and even provincial areas have been unstable, with price instability continuing around areas to be redeveloped, including the Gangnam area.
Despite such warnings, chances are that real estate prices will continue to increase, according to Seoul National University economist Kim So-young.
“Property market prices will not stabilize, because policymakers have yet to realize that market expectations cannot be managed. Home prices have doubled over the past four years and they have learned nothing,” Kim said.
Hong's remarks coincide with comments by Bank of Korea Governor Lee Ju-yeol, who said last Thursday that the first post-pandemic rate hike could be made within this year to reduce financial imbalances, as evidenced by housing market speculation and snowballing household debt.
Clearly identifying the timeline was considered to be a stronger signal compared to his previous stance when he merely mentioned that emergency expansionary monetary policies induced by the pandemic would need an “orderly, gradual drawdown.”
Also strengthening the case for an earlier-than-expected rate hike are mid-term inflation woes, as illustrated by a steeper rise in the prices of goods and services.
“Lee reiterating the central bank mandate for stability in prices and interest rates, coupled with the minister stressing that price instability in the property market reflects growing concerns over a widening financial imbalance,” Seoul National University economist Lee In-ho said. “Rising household debt and asset price bubbles, enabled by the record-low interest rate, in their view still drive prices upward. But whether the market responds in the way the top authorities want remains to be seen.”