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BOK warns against market volatility amid uncertainty, rising household debt

Published: 27 Mar. 2025, 17:23

Apartment complexes in Songpa District, southern Seoul [YONHAP]

The Korean central bank warned Thursday of the possibility of increased volatility in the financial market and its potential impact on the country's financial stability amid weak economic growth and high uncertainty at home and abroad.

The Bank of Korea (BOK) made the point in its latest financial stability report, where it also called for the close monitoring of real estate market risks and household borrowing, given the recent rise in housing prices in Seoul and the surrounding region.

“The South Korean financial system has generally stabilized, supported by the resilience of financial institutions and external payment capabilities. Amid high uncertainties and low economic growth, however, there is a chance that the volatility of financial market price variables could increase in the event of domestic or external shocks,” the BOK said in the report.

The BOK forecast Korea's economy to expand by 1.5 percent in 2025, slowing from last year's 2 percent growth, mainly due to declining exports and weak domestic demand.

“Downward pressure on economic growth has increased due to domestic political conditions and changes in the economic policies of major countries, which could delay the improvement of the financial soundness of borrowers and financial institutions,” it added.

The BOK pointed to recent instability in the real estate market and its potential impact on household debts as major risk factors.

Outstanding property-related debt stood at 2,681.6 trillion won ($1.83 trillion) as of end-2024, up 4.8 percent from a year earlier, matching 105.2 percent of the country's nominal GDP.

As of the end of February, banks' outstanding household loans rose 3.3 trillion won from the previous month, reaching 1,143.7 trillion won, according to BOK data.

“Lower interest rates could affect household debt. We are closely monitoring the market and will implement countermeasures, when necessary,” BOK Deputy Gov. Lee Jong-ryeol said at a press briefing.

In February, housing prices in Seoul logged the steepest growth in three months after the Seoul city government lifted part of the land transaction permission system in southern Seoul's Gangnam, Seocho and Songpa districts.

In response to the surge in home prices, the government reinstated the regulatory system last week.

The central bank also pointed out that growing insolvency among vulnerable groups could affect financial health.

The number of high-risk households, in terms of debt repayment capability, stood at 386,000 as of the end of March 2024, or 3.2 percent of the country's total households.

The number of households lacking debt repayment capabilities, either in terms of income or assets, totaled 3.56 million, which represented 29.7 percent of all households with financial debt.

“We would see a larger number of such households, particularly in nonmetropolitan regions, given rising unsold properties and the sluggish construction sector,” the BOK said.

The real estate market in provincial areas remains subdued in contrast to the situation in the greater Seoul region.

Yonhap