September 27, 2022

The Bank of Korea in a biannual report on financial stability reported the country’s financial system to have maintained stability. However, a rise in housing prices and high household debt is expected to become a major potential risks to financial stability.

According to the central bank, it has called for policy efforts to stabilize the housing market and control the growth of household debt.

It also mentioned that the volatility in the country’s financial market has recently heightened. However, the financial system amid the economic recovery and an improved capability to repay foreign debt has largely remained stable.

The country’s financial stability index in November reached 5.1, rebounding from the lowest level of zero in June.

The report mentioned that the country’s growing household debt and rising home prices can hurt financial stability over the medium term as they are dormant risks to the financial system.

The central bank also reported the country’s household debt has repeatedly been the main drag on its economy. The households’ high indebtedness is feared to crimp economic growth and curb domestic demand.

The country’s household credit as of end-September recorded a high figure of 1,844.9 trillion won (US$1.5 trillion), up 36.7 trillion won from three months earlier. While the combined size of household and corporate debts was in the same period 2.2 times higher than the country’s nominal gross domestic product (GDP).

As household debt continues to increase at a faster pace than income growth, concerns about households’ capacity to service debt are also rising simultaneously. The proportion of household debt to disposable income as of end-September was recorded to be 174.1 percent, up 8.1 percentage points from a year earlier.

In the recent years, housing prices in the country continued to rise sharply despite the government’s measures to calm down the property market. People in anticipation of further gains in home prices have taken out loans to buy homes.

Amid tighter lending rules and the BOK’s rate hikes, the growth of home prices has slowed since September. But an imbalance of housing supply-demand has led the housing market to remain unstable at large.

The central bank in November to rein in inflation and household debt raised the policy rate by a quarter percentage point to 1 percent.