Korean Bank's Monetary Policy Committee Also Worried About Housing Prices Amid Money Easing

Liquidity and Asset Market Concentration in Real Estate and Stocks
Real Economy-Finance Decoupling as a Transitional Phenomenon
Key Issue: Whether Decoupling Will Prolong... Policies Needed to Revive Real Economy

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] "Of course, we are worried. We cannot say we are not worried. However, we are experiencing an unprecedented crisis, and there are places where people are dying right now, so we cannot refrain from injecting money. Fortunately, with the ongoing low interest rate environment, we are just trying it once."

This was stated by a senior official of the Bank of Korea (BOK) regarding concerns that the liquidity injected in response to the economic impact of the novel coronavirus disease (COVID-19) is flowing into asset markets such as real estate. The BOK's base interest rate is at an all-time low of 0.50% per annum. While the Monetary Policy Committee unanimously lowered the rate, they also expressed concerns about the real estate market.

According to the minutes of the BOK's Monetary Policy Committee meeting (the 12th meeting of 2020, held on May 28), one committee member pointed out, "There is a widespread assessment that household deposits have gradually become short-term after the spread of COVID-19," adding, "In a situation where there are no suitable investment targets for seeking returns, the possibility of market liquidity flowing into the real estate market is always open." Another member also stated, "Due to aggressive fiscal and monetary policies, liquidity has greatly expanded, and there is a view that the upward trend in housing prices will intensify again in the second half of the year," urging, "We must not lower our guard against such possibilities."

According to the BOK, as of May, the total household loan balance of domestic banks stands at 920.7 trillion won. Compared to the increase of about 9 trillion won in February and March, the increase in household loans narrowed to about 5 trillion won each in April and May. However, a massive amount of liquidity still has no clear destination. At the end of April, the broad money supply (M2), an indicator of market liquidity, recorded 3,018.6 trillion won, surpassing 3,000 trillion won for the first time ever, an increase of 34 trillion won (1.1%) from the previous month. The size of short-term deposits under one year at deposit banks was about 252 trillion won as of the end of the first quarter, accounting for 33.3% of total deposits. Although it had fallen to 32.4% in the fourth quarter of last year, it has returned to an upward trend.

The BOK believes that since the government is quickly implementing countermeasures, market liquidity will not immediately flow excessively into the real estate market to a dangerous extent. However, they remain vigilant about where the funds without a clear destination are flowing.

Economic experts say the key issue is how long the 'real economy-financial decoupling' phenomenon will continue. Song Minkyu, Senior Research Fellow at the Korea Institute of Finance, said, "If liquidity is injected and companies perform well and other economic activities revive vigorously, side effects would be minimal. However, since the real economy has not yet recovered, the remaining money has gone into asset markets," adding, "A special event seems necessary for the real sector to revive." He also added, "This is a transitional phenomenon caused by excess liquidity, but another reason is that young people are taking this opportunity as a timing to increase their wealth."

This content was produced with the assistance of AI translation services.