This photo taken on Nov. 24, 2022 shows the building of Bank of Korea BOK in Seoul, South Korea.
Wang Yiliang | Xinhua News Agency | Getty Images
South Korea’s central bank held its policy rate at 2.5% Thursday, as it assesses the impact of recent measures aimed at cooling Seoul’s housing market.
Housing prices in Seoul spiked over 19% in June on an annualized basis, according to Goldman Sachs, prompting financial authorities to step in with measures to address rapidly expanding household loans.
The Bank of Korea noted a “significant acceleration in housing prices in Seoul and its surrounding areas, [as well as] household debt.”
The central bank had lowered rates in its last policy meeting in May at a time when the country was in the midst of a political turmoil while also facing steep tariffs on auto and steel exports from the U.S.
While South Korea’s economy contracted by 0.2% quarter on quarter in the first three months of this year amid softening exports growth and weak construction activity, the bank chose to keep rates steady, prioritizing financial stability over growth concerns.
“Financial stability is an actual mandate for the BOK unlike many of its peers, and Governor Rhee [Chang Yong] has been sounding alarms about household debt,” said Homin Lee, senior macro strategist at Swiss private bank Lombard Odier. Household debt has risen substantially over the past few months, he added.
The central bank is, however, expected to cut rates in its next policy meeting as measures to cool the housing market in Seoul take effect. Goldman Sachs said in a note last week that the introduction of new mortgage lending restrictions would “open the door” for a rate cut in the BOK’s August meeting.
Lee forecasts that the BOK will cut rates twice this year — most likely in August and November — as core inflation in South Korea is on target and the won has stabilized against the dollar, but the bank will likely opt for an “extended hold” after these two cuts due to household debt concerns.
The BOK on Thursday said it was critical to evaluate the effect of macro policies given the rise in risks associated with the housing market in Seoul and rising household debt, while also “remaining cautious about the possibility of heightened volatility in the foreign exchange market.”
Goldman in its note pointed out that household loan growth in Korea surged to 6 trillion won ($4.27 billion) in May — the fastest pace since last October — and is estimated to have reached 7 trillion won in June.
“The housing market in Seoul and its surrounding areas, which had previously shown signs of overheating, appears to be stabilizing somewhat following the implementation of the government’s household debt measures,” the BOK said Thursday.
South Korea faces economic headwinds as U.S. President Donald Trump has threatened to impose 25% tariffs on all South Korean imports starting Aug. 1, if the country fails to reach a trade deal with Washington.
The country’s benchmark Kospi index was up 0.74%, while the won strengthened marginally to trade at 1,372.48 against the dollar.
High debt from housing
Household debt in South Korea plays a huge part in the central bank’s monetary policy considerations, due to the country’s unique rental system.
Unlike most rental systems around the world, South Korean renters pay a deposit known as “jeonse” or “key money,” instead of a monthly rent to landlords.
The jeonse is a deposit about 50%-80% of the market value of the property. At the end of their lease, the deposit is returned to the renter. For the landlord, the jeonse is an interest-free loan, which they are free to invest.
However, renters will usually take out a loan to fund the jeonse deposit, which causes “a lot of burden and excess debt in the system for housing,” Samuel Rhee, co-founder, chairman and group chief investment officer for wealth platform Endowus told CNBC.
Park Jeongwoo, Nomura’s economist for South Korea and Taiwan, told CNBC earlier this year that the BOK was concerned about the negative long-term impact of higher household debt on growth.
“The BOK thinks [the] higher debt burden has weakened households’ spending power. At the same time, strong debt-financed demand for housing [has] resulted in distorted capital allocation across the economy, leading to more allocation of capital to not-productive sectors.”
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