Seoul: The South Korean central bank has issued a warning regarding potential financial market volatility, emphasizing the impact it could have on the nation's financial stability amidst sluggish economic growth and significant uncertainties both domestically and internationally. The Bank of Korea (BOK) highlighted these concerns in its latest financial stability report, calling for heightened surveillance of real estate market risks and household borrowing, particularly after recent increases in housing prices in Seoul and its surrounding areas.
According to Yonhap News Agency, the BOK underscored the general stability of South Korea's financial system, which is bolstered by the strength of financial institutions and external payment capabilities. Nevertheless, the report warned of the potential for increased volatility in financial market price variables should any domestic or external shocks occur, given the current high uncertainties and low economic growth.
The BOK projects a slowdown in South Korea's economic growth to 1.5 percent in 2025, a decline from the previous year's 2 percent growth, attributed primarily to a drop in exports and weak domestic demand. The report also noted that domestic political conditions and shifts in the economic policies of major countries could exacerbate downward pressure on economic growth, potentially delaying improvements in the financial soundness of borrowers and financial institutions.
Recent instability in the real estate market and its implications for household debt levels were cited as major risk factors by the BOK. Property-related debts reached 2,681.6 trillion won (approximately US$1.83 trillion) by the end of 2024, reflecting a 4.8 percent increase from the previous year and equating to 105.2 percent of the nation's nominal GDP.
By the end of February, banks' outstanding household loans increased by 3.3 trillion won from the previous month, totaling 1,143.7 trillion won, based on BOK statistics. Lee Jong-ryeol, a BOK deputy governor, emphasized the potential impact of lower interest rates on household debts and affirmed that the market is under close observation, with countermeasures ready to be implemented as necessary.
Housing prices in Seoul experienced the most significant growth in three months in February, following the Seoul city government's decision to partially lift the land transaction permission system in specific areas of Gangnam, Seocho, and Songpa. In response to the housing price surge, the government recently reinstated the regulatory system.
The central bank also expressed concerns about the increasing insolvency among vulnerable groups and its potential effects on financial health. By the end of March 2024, the number of high-risk households, in terms of debt repayment capabilities, reached 386,000, representing 3.2 percent of the country's total households. Additionally, 3.56 million households, or 29.7 percent of all households with financial debts, were identified as lacking debt repayment capabilities either in terms of income or assets.
The BOK forecasted a rise in the number of such households, particularly in nonmetropolitan regions, due to the increasing number of unsold properties and the sluggish construction sector. The real estate market in provincial areas remains subdued compared to the greater Seoul region.