[2020 National Audit] Bank of Korea "Consistent Real Estate Measures Needed, Expected Returns Should Be Lowered"

Lee Ju-yeol "High Uncertainty in Growth Path... Accommodative Monetary Policy Operation"

Lee Ju-yeol, Governor of the Bank of Korea [Photo by Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] The Bank of Korea stated that some increase in household loans was inevitable during the response to the economic downturn caused by the novel coronavirus infection (COVID-19). While it is true that accommodative financial conditions such as the ultra-low interest rate trend due to the base rate cuts have been a factor increasing housing demand, recent circumstances indicate that concerns about housing supply and expectations of price increases have played a significant role. The Bank of Korea emphasized that the government’s housing market stabilization measures should be consistently implemented to lower the expected returns on housing investments themselves.

On the 16th, in the National Assembly’s Planning and Finance Committee audit report, in response to People Power Party lawmaker Heesook Yoon’s question about the view that the recent surge in real estate prices was caused by the Bank of Korea’s base rate cuts and quantitative easing, the Bank replied, "Housing prices are influenced by various factors including not only interest rates but also housing supply conditions and government housing-related policies," adding, "Especially recently, concerns about housing supply and expectations of price increases have significantly contributed, leading to a capital inflow phenomenon into the housing market."

The Bank also mentioned that without the base rate cuts, the COVID-19 shock would have been greater. The Bank of Korea stated, "Looking back at the situation from March to May, COVID-19 rapidly spread domestically and internationally, causing the economy to contract sharply, stock prices to plunge, and exchange rates to rise significantly, greatly increasing uncertainty," and emphasized, "The Bank’s base rate cuts and liquidity supply expansion were natural and inevitable policy responses, and without these measures, the real economy’s slowdown would have been more severe."

It was explained that without the base rate cuts, credit crunch would have worsened, significantly deteriorating corporate borrowing conditions, which would have caused considerable side effects such as increased corporate delinquency rates, more marginal companies, and expanded unemployment. The Bank added that without its response, refinancing of corporate bonds and commercial papers (CP) would have become difficult, severely damaging corporate financial structures, and many more companies might have gone bankrupt. Furthermore, it stated, "Actively expanding the accommodative monetary policy stance, including substantial base rate cuts in response to the COVID-19 crisis, was an appropriate policy response."

However, it was noted that household debt was already at a high level, and the rate of increase has become steeper compared to before COVID-19. In response to a question from Democratic Party lawmaker Suheung Kim about the Bank’s stance on household debt management, the Bank said, "Excessive capital inflows riding on asset price increases such as real estate and stocks pose risks of worsening financial imbalances, including household debt accumulation and price bubbles," and added, "To prevent excessive household leverage expansion, it is necessary to gradually control the pace of credit growth through macroprudential policies while monitoring economic conditions."

The Bank also advised that the government’s housing market stabilization measures should be consistently pursued. It stressed the need to lower the expected returns on housing investments to ease capital inflows into the housing market and to strengthen financial institutions’ credit risk management efforts in response to the high growth rate of credit loans.

However, every time the government announces real estate-related measures, housing prices continue to rise, and the scale of loans for home purchases keeps increasing, so the advice to "consistently pursue housing market stabilization measures" is unlikely to gain consensus. According to data submitted by the Bank to lawmaker Kim, even after the announcement of the December 16 real estate measures, the monthly household loan balances of deposit-taking institutions in Seoul and the metropolitan area continued to record high increases. The increase in household loan balances in Seoul by deposit-taking institutions, which was 1.9 trillion won in December last year, decreased to 800 billion won in January but then recorded high increases of 2.4 trillion won in February and 4.1 trillion won in March. In July, it also increased by 3.4 trillion won.

Meanwhile, Bank of Korea Governor Juyeol Lee attended the audit on the same day and said, "Although the domestic economy began to show signs of improvement in the second half, the recovery has slowed due to the resurgence of COVID-19," adding, "The global economy is gradually improving, and exports are expected to lead a moderate recovery, but uncertainty about the future growth path remains high." He further stated, "The Bank of Korea plans to continue operating monetary policy accommodatively to support the domestic economic recovery."

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