[2020 National Audit] Bank of Korea: "Rapid House Price Increase Not Only Due to Low Interest Rates... Consistent Policy Needed" (Comprehensive)

Lee Ju-yeol "Carefully Monitor Asset Market Fund Flows and Household Debt Increase"
"Growth Path Uncertainty Still High... Maintain Accommodative Monetary Policy"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea recently evaluated that the recent surge in real estate prices was driven not only by interest rates but also significantly by concerns over housing supply and demand conditions and expectations of price increases. The interest rate cuts were inevitable in response to the economic downturn caused by the novel coronavirus infection (COVID-19), and the rapid rise in housing prices should be controlled through consistent government housing market stabilization measures. This means that the expected return on housing investment itself must be lowered, effectively calling for the government’s firm real estate policies.

On the 16th, the Bank of Korea responded in the National Assembly’s Planning and Finance Committee audit report to People Power Party lawmaker Yoon Hee-sook’s question, "There is a view that the surge in real estate prices was caused by the Bank of Korea’s base rate cuts and quantitative easing," stating, "Housing prices are influenced by various factors including not only interest rates but also housing supply and demand conditions and government housing-related policies." They added, "Concerns over supply and expectations of price increases are significantly influencing the market, leading to a capital influx into the housing market." Furthermore, they emphasized, "The Bank of Korea’s lowering of the base rate and expansion of liquidity supply were natural and inevitable policy responses under the COVID-19 situation, and without such measures, the slowdown in the real economy would have been more severe."

However, they noted the need to pay attention to the steep increase in household debt. In response to Democratic Party lawmaker Kim Soo-heung’s inquiry about the Bank of Korea’s stance on household debt management, the bank stated, "Excessive capital inflows riding on asset price increase expectations may exacerbate financial imbalances," and added, "To prevent excessive household leverage expansion, it is necessary to gradually control the pace of credit growth through macroprudential policies depending on economic conditions." Bank of Korea Governor Lee Ju-yeol also stated in his opening remarks at the audit, "We will carefully monitor changes such as asset market capital flows and the increase in household debt." The Bank of Korea also explained that consistent implementation of housing market stabilization measures is necessary to address concerns about supply shortages and expectations of further housing price increases through policy.

The Bank of Korea’s accommodative monetary policy is expected to continue for an extended period. Governor Lee said, "Although the domestic economy began to show signs of improvement in the second half of the year, the recovery has slowed due to the resurgence of COVID-19," adding, "Uncertainty about the growth path remains high." He further stated, "Going forward, the Bank of Korea plans to continue operating monetary policy in an accommodative manner to support the domestic economic recovery."

The consumer price inflation rate has not reached the Bank of Korea’s medium-term price stability target (2%). The bank forecasts that consumer prices will gradually rise after next year and stated, "In Korea’s case, there is no sharp drop in asset prices, the inflation situation is not deflationary, and export market share is generally maintained, so it differs from Japan’s ‘Lost 30 Years.’" Additionally, they advised, "To prevent a long-term recession like Japan’s, structural reforms are necessary to improve productivity and create new growth engines."

The Bank of Korea is currently re-estimating the potential growth rate, which is believed to have changed significantly due to the COVID-19 shock. Urgent tasks to raise the potential growth rate include ▲responding to low birth rates and aging population ▲discovering new growth engines ▲relaxing regulations and entry barriers ▲improving the efficiency of resource allocation ▲supporting research and development and innovative startups. They also stated, "If the current government’s expansionary fiscal spending can substantively support productivity improvement and structural reforms in qualitative terms, it can further increase its contribution to the potential growth rate."

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