The Bank of Korea has warned that rising housing prices in the metropolitan area and increasing household debt could lead to a widening financial imbalance. While the economy continues to grow robustly, driven by a strong semiconductor market, the benefits of this growth are not evenly distributed, raising concerns about potential vulnerabilities in weaker sectors as interest rates rise.
In its 'Financial Stability Situation' report released on September 22, the Bank of Korea's Monetary Policy Committee assessed that the domestic financial system remains generally stable, supported by the resilience of financial institutions and external payment capabilities. However, it identified potential risks, including rising housing prices, pressures from household debt, the possibility of defaults in vulnerable sectors, and increased volatility in financial and foreign exchange markets.
The Financial Stress Index (FSI), which indicates short-term financial market instability, slightly increased from 19.3 in July to 19.5 in August, remaining within the cautionary range of 12 to 24. The Financial Vulnerability Index (FVI), which reflects the accumulation of medium- to long-term financial imbalances, rose to 46.5 at the end of the second quarter, continuing its upward trend due to increases in household credit and housing prices.
Bank of Korea Deputy Governor Jang Jeong-soo noted, "The FVI has risen for nine consecutive quarters since recording 37 in the first quarter of 2024, reaching the long-term average level. We need to remain vigilant regarding the recent trend of accumulating financial vulnerabilities."
While the overall growth of household debt has slowed, the Bank of Korea believes there is a possibility of renewed increases, particularly in housing-related loans. In the second quarter, household loans expanded due to rising housing prices and stock prices, with both housing-related and other loans increasing more than in the previous quarter.
In August, total household loans across the financial sector increased by 2.6 trillion won, a significant decrease from the previous month's increase of 6.4 trillion won. However, mortgage loans rose by 4.3 trillion won, up from 3.6 trillion won in July. The decline in other loans has made it difficult to conclude that household debt has entered a stable phase.
The Bank of Korea assessed that the household debt ratio has decreased significantly due to robust growth in gross domestic product (GDP). At the end of the first quarter, the household debt ratio stood at 85.3%, down 2.8 percentage points from 88.1% at the end of the previous year. However, the decline in private credit leverage is primarily attributed to economic growth driven by a surge in semiconductor exports, necessitating continued deleveraging efforts in anticipation of changes in domestic and external economic conditions, such as reduced AI-related investments.
In the metropolitan housing market, some areas continue to experience significant price increases, and expectations for rising housing prices remain high. Recently, demand has concentrated in regions with a higher proportion of mid- to low-priced homes, indicating regional differentiation. The upward trend in rental prices has also significantly expanded, particularly in the metropolitan area.
Credit risk in the corporate sector remains a major concern. The corporate delinquency rate continues to exceed long-term averages, with a slight increase primarily in non-bank and small business loans. Notably, certain domestic sectors, such as real estate and hospitality, still have a high proportion of marginal firms, while some manufacturing sectors, including metal products and petrochemicals, have also seen a relatively large increase in marginal firms.
The resilience of financial institutions is at a satisfactory level. The capital ratios of banks and non-bank financial institutions significantly exceed regulatory requirements, and liquidity ratios are also above the required levels. However, some non-bank financial institutions, such as savings banks, securities companies, and specialized credit finance companies, have seen a decline in liquidity ratios due to increased liquidity liabilities.
The Bank of Korea emphasized the need for complementary macroprudential and monetary policies to prevent the expansion of financial imbalances, given the high expectations in the metropolitan housing market and the potential for increased household debt. It plans to closely monitor financial stability conditions, including inflation, growth, housing prices in the metropolitan area, and household debt, to determine the timing and pace of any future interest rate hikes.
Deputy Governor Jang stated regarding the decline in the household debt ratio, "While the increase in household loans has moderated, the significant growth in nominal GDP has played a substantial role in expanding the denominator. Considering the expectations for rising real estate prices and recent increases in housing prices, we must maintain our approach to managing household debt."
He also addressed the burden on vulnerable sectors due to rising interest rates, noting, "While households have reduced their reliance on variable-rate loans and the proportion of vulnerable borrowers has decreased compared to past rate hike periods, corporations still have a high proportion of variable-rate loans, and the share of marginal firms has been on a continuous rise. The burden of interest rate increases may be more pronounced for vulnerable companies than for households."
* This article has been translated by AI.
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