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| People look over downtown from Mount Nam, Seoul, Aug. 13. Newsis |
BOK to maintain tightening stance to stabilize household loans, inflation
By Lee Yeon-woo
The Bank of Korea (BOK) raised concerns, Thursday, that the housing market in Korea remains overpriced compared to people's incomes. According to the central bank, the average household would need to save 26 years of annual income to afford a home.
In its quarterly report submitted to the National Assembly, the BOK noted that the housing price-to-income ratio stood at 26. This means an average worker would need to save their entire salary for 26 years to buy a medium-sized 90-square-meter apartment. The ratio stood at 17.6 in 2019, 17.4 in 2020, 23.6 in 2021 and 29.4 in 2022.
"Housing prices remain at a high level, diverging from income. When compared with fundamental economic conditions, they are still considered elevated," the report stated.
Starting in April, bank-issued household loans have increased steadily, reaching a concerning level. As of last month, the loan amount surged by over 25 trillion won ($18.8 billion) in just five months, with housing mortgage loans pulling up the aggregate loans.
More alarmingly, household loans are projected to see a further short-term rise in the second half of the year, driven by a rebound in transactions. This surge is expected to be amplified further by a growing number of apartments going on sale in the latter half of this year, the BOK evaluated.
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| Bank of Korea (BOK) Deputy Governor Lee Sang-hyeong speaks during a press briefing at its headquarters in Seoul, Thursday. Courtesy of the BOK |
"Unlike major economies, Korea's household debt has seen a relentless rise without any deleveraging. The BOK believes that it reached a point where it can threaten microeconomic and financial stability," the report noted.
"An excessive level of household debt poses a detriment to the Korean economy by stifling long-term growth and exacerbating asset inequality. Coordinated collaboration between financial authorities is crucial to sustain deleveraging efforts over the medium to long term."
Accordingly, the BOK has once again signaled its intention to maintain a tightening stance in its policy rate operation, citing prevailing inflation. Factors such as rising oil and raw material prices, amid other uncertainties, were also cited as reasons for this approach.
The central bank indicated it will evaluate the need for a further hike in the key interest rate, targeting an inflation rate within the 2 percent range.
The central bank kept the key interest rate steady at 3.5 percent for the fifth time in a row in August, while BOK Governor Rhee Chang-yong continued hinting at a hawkish stance.
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