[Q&A] Lee Ju-yeol "Capital Region Housing Prices Overvalued... Significant Debt Investment"

On the morning of the 15th, Lee Ju-yeol, Governor of the Bank of Korea, is speaking at a press conference on monetary policy direction held at the Bank of Korea in Jung-gu, Seoul.

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] Lee Ju-yeol, Governor of the Bank of Korea, assessed that South Korea's housing prices, especially in Seoul and the greater metropolitan area, are significantly overvalued at a very high level. He pointed out that household debt is a major concern behind the surge in real estate prices in Korea.

Governor Lee stated at an online press conference immediately after the Monetary Policy Committee meeting on the 15th, in response to a question about recent real estate price levels, "Looking at the Price-to-Income Ratio (PIR), domestic housing, particularly in the metropolitan area, is significantly overvalued at a very high level," adding, "Currently, expectations that housing prices will rise are forming, leading to a continued upward trend."

He expressed concern that the rise in prices is closely linked to an increase in debt, more so than the housing prices themselves. Governor Lee explained, "While rising housing prices are a common phenomenon in other countries as well, in our case, asset investment through borrowing is quite substantial."

Given the prolonged ultra-low interest rate environment, where borrowing to invest in risky assets has become widespread, he suggested that interest rate hikes are necessary to reduce risks in this area. Governor Lee said, "I believe the profit-seeking behavior of economic agents is quite excessive. Since resolving asset investment through excessive borrowing takes considerable time, it is important not to delay but to make efforts to improve the situation quickly." He also added, "There was discussion at today's Monetary Policy Committee meeting, and almost all members emphasized that it is time to focus on resolving financial imbalances."

The following is a Q&A from Governor Lee's press conference.

- The fourth wave of COVID-19 has begun. If this trend continues, will there be any change in the plan to raise the base interest rate within the year?

▲ It is true that uncertainty regarding the progression of COVID-19 has increased. Private consumption is expected to be somewhat affected. However, with the government's swift quarantine measures and expanded vaccination plans being implemented, the spread is expected to ease somewhat. Additionally, if the effects of the government's supplementary budget are added, the economic recovery is not expected to be significantly damaged. We will closely monitor how the spread of COVID-19 affects decisions on the base interest rate going forward. Although there were concerns and discussions at this meeting, the decision to hold the rate was made to observe the impact of COVID-19 spread further.

- Could the initially forecasted 4% economic growth rate and around 2% inflation rate in the second half change?

▲ This year's growth rate is expected to generally align with the 4% level forecasted in May. Although confirmed cases have increased significantly, as quarantine measures take effect, the resurgence is not expected to have a major impact on the growth trend. Unlike the winter surge, large-scale vaccination is planned, and the effectiveness in preventing severe cases has been well demonstrated. Economic agents have also improved their learning effect regarding infectious diseases. Exports and investment are expected to maintain a solid trend. Inflation is expected to be slightly higher than the May forecast, remaining above 2% for some time. Oil prices have also exceeded $70, showing a higher-than-expected upward trend.

- If interest rate hikes are delayed due to the COVID-19 resurgence, won't financial imbalance problems continue?

▲ Although the government has long strengthened macroprudential regulations, risk-taking behavior by economic agents has continued, leading to increased asset investment through borrowing. As long as expectations that the low interest rate environment will persist remain, the effectiveness of macroprudential measures will be limited. This trend has been observed recently. Therefore, it is increasingly necessary to address financial imbalances through a combination of macroprudential policies and normalization of monetary policy within the limits allowed by macroeconomic conditions.

- Is there a possibility of additional government bond purchases by the Bank of Korea?

▲ The Bank of Korea announced plans at the beginning of the year to purchase government bonds worth 5 to 7 trillion won in the first half of this year to mitigate market interest rate volatility. We have conducted four rounds of simple purchases totaling 6 trillion won. If deemed necessary to ease market interest rate volatility, we plan to implement market stabilization measures such as simple government bond purchases.

- What is your position on the controversy over universal disaster relief payments?

▲ The COVID-19 situation has lasted for a year and a half, during which some groups have clearly suffered damage while others have seen increased wealth. Since it is uncertain when COVID-19 will end and how much funding will be needed going forward, from the perspective of fiscal efficiency, it seems more persuasive to focus support on the groups that have been harmed.

- Raising interest rates will increase the burden on self-employed individuals, right?

▲ The premise of normalizing interest rates is that the economic recovery will continue. It is true that some vulnerable groups still face difficulties even as the economy recovers. I believe policy support should continue for these vulnerable sectors. If the easing stance is maintained for too long amid improving macroeconomic conditions, the side effects from accumulated financial imbalances will worsen. Regarding the extension of the Bank of Korea's COVID-19 support programs for affected companies and financial intermediary support loans, we will review the situation and consider extension or strengthening measures if necessary.

- Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki and Minister of Land, Infrastructure and Transport Noh Hyung-wook mentioned the possibility of a housing price peak. Do you agree?

▲ Factors that raise and lower housing prices are mixed. Currently, expectations of rising housing prices are forming, leading to a continued upward trend. Evaluating the appropriateness of housing prices, they are judged to be significantly high and overvalued. Looking at the Price-to-Income Ratio (PIR), the metropolitan area including Seoul is considerably higher than other countries. Even compared to past long-term averages based on rent, housing prices in the metropolitan area remain quite high. What is particularly concerning is that low interest rates have continued, causing asset prices to rise. This is a common phenomenon in other countries as well, but our problem is that price increases are closely linked to rising debt. Asset investment through borrowing is quite substantial, which contrasts with other countries.

- There are opinions that the capacity to operate monetary policy has diminished due to the fourth wave of COVID-19, and that the supplementary budget has become more universal in nature. What is your view on criticisms that fiscal policy is hindering monetary policy?

▲ In conclusion, I do not agree with the view that fiscal policy is hindering monetary policy. Monetary policy decisions are based on macroeconomic indicators. The biggest difficulty in our economy is excessive debt. I believe the profit-seeking behavior of economic agents is quite excessive. Since resolving asset investment through excessive borrowing takes considerable time, it is important not to delay but to make efforts to improve the situation quickly. The direction of monetary policy also reflects this priority. As mentioned at today's Monetary Policy Committee meeting, almost all members emphasized that it is time to focus on resolving financial imbalances.

- Earlier, you said you would maintain an accommodative monetary policy stance "for the time being," but this phrase does not appear in the monetary policy statement this time. Was there any discussion about using this phrase?

▲ In May, I said we would maintain the current accommodative stance "for the time being," and two months have passed since then. Although COVID-19 has resurged, considering the economic recovery, inflation, and risks from accumulated financial imbalances comprehensively, I think it is time to discuss and review whether adjusting the degree of monetary policy accommodation is appropriate starting from the next Monetary Policy Committee meeting. There was also discussion about the phrase "for the time being" today.

- Since your appointment as governor, interest rates have been adjusted within 1-2 months after minority opinions were expressed at the Monetary Policy Committee. Even if confirmed cases remain above 1,000, is it possible to raise rates depending on circumstances?

▲ We will observe a bit more. It is difficult to say absolutely based on the number 1,000 confirmed cases. We have not set a timetable to raise rates unconditionally. The most important thing is whether the economic recovery continues and whether it aligns with that. Minority opinions were not made without understanding the economic situation. Looking at the minority opinions, based on the Research Department's forecasts, the decision to normalize rates was made prioritizing financial stability at the Monetary Policy Committee.

- Indications of an interest rate hike in August or within the year?

▲ Again, no timetable has been set. If the economic recovery continues, normalization of interest rates will not be delayed much. I think the spread of the Delta variant will subside as vaccination expands. If it subsides, consumption and economic recovery will proceed smoothly. In that case, an interest rate hike within the year is possible. However, we have not set a timetable to raise rates unconditionally within the year regardless of what happens.

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