Housing bubble biggest risk to Korean economy: BOK

Bank of Korea Deputy Governor Lee Sang-hyeong, right, speaks during an online press conference at its headquarters in Seoul, Thursday. Courtesy of the Bank of Korea

Bank of Korea warns external shocks could burst housing market bubble

By Lee Min-hyung

Korea's housing market bubble has reached its historical peak, posing the biggest potential risk to the economy during a cycle of monetary tightening, the Bank of Korea (BOK) said in a financial stability report, Thursday.

According to the central bank, the nation's financial vulnerability index (FVI) in the real estate sector came in at 100 as of the end of September, up by 2.77 points from the previous quarter. An index nearing 100 signifies an overheated real estate market. This figure is the highest since the BOK started compiling such data in 1996.

The central bank attributed the steep rise in housing prices to a widening financial imbalance after a growing number of households here have in recent years went on a buying spree of apartments and other types of residential property by taking out loans.

The BOK also rang an alarm bell on the possibility of the bubble bursting if the economy is hit by external financial shocks that may result in a collapse of global asset prices. In a worst-case scenario, the central bank expects Korea's economy to shrink 3 percent in the third quarter of 2022, compared to a year ago.

“The financial market and the economy will be hit hardest by possible shocks, particularly at a time when financial vulnerability has widened due to such reasons as deepened financial imbalance,” BOK Deputy Governor Lee Sang-hyeong told reporters during an online press conference.

But he noted that the real economy has not yet entered such a phase, as household debt and a series of FVI indices are not as serious as during the 1997 Asian financial crisis or the 2008 global financial crisis.

In the report, which was submitted to the National Assembly, the central bank left open the possibility that housing prices here might be adjusted if households reduce spending and seek to secure liquidity by selling their real estate assets, due to growing financial burdens amid interest rate hikes.

The repeated warning message concerning household debt is seen as part of the BOK's signal to justify another key rate hike possibly in January or February of next year. The central bank started increasing the key rate in August and did so once more in November to curb household borrowing, which has surged for the past two years due to near-zero interest rates. BOK Governor Lee Ju-yeol also reiterated his willingness to curb the widening financial imbalance and growing inflationary pressure by raising the key rate further.

Korea's total household debt doubled to 1,845 trillion won at of the end of the third quarter, from 843 trillion won at the end of 2010, according to the BOK report. The country's total household debt in the third quarter debt grew 9.7 percent from the previous year.

As of the end of last year, the average net assets obtained by households in the bottom 20-percent bracket decreased by 2.33 million won from the end of 2017, while their average debt increased by 7.43 million won during the same period. But those in the top 20-percent bracket succeeded in increasing their asset value by 71.15 million won on average, while their average debt rose only by 29.71 million won.