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Korea's housing market capitalization reached 6,209 trillion won ($4.5 trillion) last year, nearly three times the country's nominal GDP, which stood at 2,162 trillion won. The ratio of household debt to GDP, meanwhile, is much higher than that of other economies, leaving Korean households vulnerable to high interest rates, the central bank warned.
According to the latest financial stability report confirmed by the Monetary Policy Committee of the Bank of Korea (BOK) on Tuesday, the country's housing market cap in 2009 was slightly more than double the nominal GDP. However, house prices continued to increase, widening the gap with the GDP level since.
The housing market cap of Korea exceeded 1,000 trillion won in 2000, up from 832 trillion in 1995. After exceeding 2,000 trillion won in 2006, it then increased to 3,000 trillion won in 2010 and 4,000 trillion won in 2016, until it peaked at 6,552 trillion won in 2021 amid the low interest rate.
This means that the rate of increase in housing asset prices is much faster than the rate of increase in the national economy, further expanding households' loans compared to their incomes.
Furthermore, the ratio of household debt to GDP during the second quarter of this year went up for the first time in four quarters. The BOK report shows that the household debt-to-GDP ratio in the second quarter stood at 101.7 percent, up 0.2 percentage points from 101.5 percent in the first quarter.
Korea's household debt-to-GDP ratio is currently in the world's top four, far exceeding the average of developed countries at 73.4 percent and emerging countries at 48.4 percent. It is even more worrisome that the increase took place amid growing concerns over the U.S. Federal Reserve's prolonged monetary tightening direction to maintain high interest rates.
As the upward trend of the ratio could cause financial instability for the nation's households, the BOK recommends that the financial authorities control the speed of supplying policy mortgage loans, as well as place checks on banks' long-term mortgage loans and internet bank loans, which have particularly surged lately.
The report also suggests strengthening debt service ratio (DSR) regulations, along with the necessity of preparing a capital buffer and stricter macroeconomic policy stances regarding financial soundness. The housing supply and the expansion of loan installments are other recommended tasks.
The BOK warned that the ratio of household debt to GDP could rise to 103 percent in the next year, and called for countermeasures.
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