Central bankers warn against overheated property market

By Choi Sung-jin

The Bank of Korea, like it or not, has been maintaining a loose monetary policy to help keep the coals of economic recovery alive. In and outside the central bank, however, there are voices warning against an overheated real estate market as one of the consequences of its low-interest rate policy.

According to the minutes of the July meeting of the BOK’s Monetary Policy Board, four out of its six members, aside from Governor Lee Ju-yeol, expressed concerns about snowballing household debt in deciding monetary policy direction.

“The corporate credit cycle has entered into a contracting phase since the first quarter of last year, but the household credit cycle has been on an expansionary phase since 2014,” said one of the six board members. “The household credit curve is closely related to housing prices, and the housing industry cycle has been considerably alienated from the real economy.”

Another board member noted that the ratio of household debt to disposable income has been rising for several years. “Considering the recent housing market, the ratio is likely to go up further,” he said.

The ratio of household debt to disposable income rose from 130.7 percent in 2012 to 139.8 percent last year and to 145.6 percent in the first quarter of this year. The board member said: “The increase of household debt, which is alienated from real economic situations, can’t help but face adjustment, affecting the real economy in the process.”

There were also discussions about the possibility of Korea’s construction industry making a hard landing -- following the example of Japan -- reflecting mounting concerns among experts about construction investment.

Analysts said concerns about household debt within the top policymaking body were due to its awareness of criticisms the economy has hardly improved despite the continuous lowering of key interest rates since 2014, which has only pushed up real estate prices instead.

According to Real Estate 114, a property market information provider, national apartment prices in the second quarter of this year rose 10.61 percent compared with the first quarter of 2014. The increase of private consumption against gross domestic product during the period climbed 4.6 percent, less than half the housing price increase, however.

In BOK’s internal reports, too, concerns about an overheated real estate market are mounting and their frequency is increasing. In its July report, the central bank noted that housing prices were falling in the southeastern metropolises of Busan and Daegu, and pointed to low-income self-employed people in their 40s as a “risky group” in household debt.

In another report last month, the central bank said the portion of Korea’s construction investment against GDP was about 15 percent, next only to those OECD countries that have large land areas compared with their populations, such as Australia, Canada and Norway.

Since Governor Lee took office in 2014, the benchmark interest rate has fallen from 2.75 percent to 1.25 percent, increasing household debt by 16 percent as of the first quarter of this year. “We were clearly worried about household debt when the BOK lowered the key interest rate,” a board member said. “But there was a strong atmosphere the central bank could no longer freeze the rate amid the protracted business slump.”

Another board member said although continuous rate reductions have helped bolster domestic demand, the time has come to question “how high real estate prices should be allowed to go up.”

Critics of the central bank, however, pointed to the BOK’s hypocrisy, noting that it was only a month ago that the board lowered the policy rate unanimously. “The board’s concerns somewhat contradict the BOK’s attitude that has strenuously supported monetary easing,” said Professor Cho Sung-hoon of Yonsei University. “Inconsistent monetary policy only increases uncertainty, so the BOK needs to make clear its short-term policy goals.”