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Soaring real estate prices tie BOK's hands on rate

Published: 01 Jul. 2025, 18:06

Apartment buildings as seen in Songpa District, southern Seoul, on June 29 [NEWS1]

Korea’s central bank warned that household lending could spike sharply through the end of the third quarter, as real estate prices accelerate in Seoul and its suburbs — a red flag that may delay any move to cut interest rates.

In a report submitted to the presidential state affairs committee on June 27, senior Bank of Korea (BOK) officials including Vice Gov. Yoo Sang-dae voiced growing concern over swelling debt and overheating in the housing market, particularly in high-demand districts of Seoul.

The government held an emergency meeting earlier on Tuesday at 8 a.m. to finalize new lending curbs and announced them at 11:30 a.m., while the BOK’s briefing ran from 10:30 a.m. for about 90 minutes.

The central bank warned that the housing market in the greater Seoul area is showing signs of overheating, with both prices and transactions accelerating.

The central bank noted that apartment prices in Seoul rose in June at the fastest pace since September 2018.

In the city’s affluent Seocho, Gangnam and Songpa districts in southern Seoul, weekly apartment price gains in the fourth week of June translated to an annualized 53.7 percent increase. These expectations are quickly spreading across all of Seoul and key parts of the capital region, the BOK said.

If this trend continues, the central bank projects household lending could surge in August or September.

In August of last year, household loans at Korea’s five largest commercial banks grew by nearly 10 trillion won ($7.4 billion) in a single month, marking a record increase.

Preliminary data suggests loans jumped by around 6 trillion won in May and nearly 7 trillion won in June of this year.

“If the overheating does not cool, it could undermine the debt management framework we’ve maintained so far," the BOK stressed. "We must remain especially vigilant.”

A client sits at a customer service counter for loans at a commercial bank in Seoul on July 1, 2025. [NEWS1]

Because it typically takes one to three months for loans to be fully executed after approval, the BOK expects household debt to keep rising for now despite the government’s new three-stage stress debt service ratio (DSR) program that took effect earlier this month.

The DSR is used to assess how much of a borrower’s income can go toward repaying the principal and interest.

“We will decide the timing and pace of any rate cuts carefully so that excessive expectations don’t further fuel housing sentiment,” the central bank said, underscoring its hawkish stance.

Gov. Rhee Chang-yong has repeatedly cautioned that lowering the key rate could simply drive money into the property market, limiting its impact on broader economic activity.

The central bank also flagged concerns that credit supplied by financial institutions is increasingly concentrated in real estate, crowding out productive sectors.

As of the end of last year, real estate-related credit totaled 1.92 quadrillion won, amounting to 49.7 percent of all private sector credit.

House listings are posted on a real estate agency in Seoul on July 1. [NEWS1]

In the same report, the BOK laid out stronger measures it could propose if home prices fail to stabilize under existing lending restrictions.

These include expanding the scope of areas designated as regulated zones — adjustment zones, speculative areas and speculative overheating districts — as well as adding more land transaction permit zones within Seoul that require local government approval of a sale.

Currently, only the Seocho, Gangnam, Songpa and Yongsan Districts fall under such controls, but surrounding neighborhoods with sharp price gains could be added.

The BOK is also reviewing ways to extend DSR coverage to state-issued loans and loans for jeonse (long-term lease deposits) in the greater Seoul area that are taken out by households that already own homes.

Government loans are excluded from DSR rules right now, which leaves a blind spot in household debt oversight, the BOK noted.

Additionally, the central bank is considering raising the risk weights applied to banks’ mortgage portfolios. Higher minimum risk weights on new mortgages would force banks to hold more capital, likely prompting them to tighten lending standards.

The BOK said it will continue to closely monitor housing market risks and household debt trends.

The bank added that it will maintain a macroprudential policy stance in coordination with the government and stand ready to act if necessary.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY JEONG JAE-HONG [[email protected]]