The Bank of Korea Says "If Owner-Occupied Housing Costs Are Reflected, Inflation Will Be Higher Than the Mid-2% Range"

BOK Issue Note - Owner-Occupied Housing Costs and Consumer Prices

[Asia Economy Reporter Eunbyeol Kim] The Bank of Korea has evaluated that there is a need to realistically reflect the burden of housing costs in consumer prices. The current consumer price inflation rate, which is in the mid-2% range, is expected to be higher if the burden of housing costs is taken into account. However, there are various constraints in reflecting housing prices, and since excessive volatility in prices could occur depending on housing prices, it is pointed out that it is necessary to reflect this in the indicators through comprehensive consideration.

On the 28th, the Bank of Korea stated in the 'BOK Issue Note - Owner-Occupied Housing Costs and Consumer Prices' that "consumer prices in Korea, which do not include owner-occupied housing costs, reflect the burden of housing costs less than major countries," and "the higher the reflection rate of housing prices in owner-occupied housing costs, the smaller the gap with perceived housing costs, but the volatility of consumer prices may increase."

Lee Jung-ik, head of the Price Trends Team at the Bank of Korea's Research Department, explained, "If owner-occupied housing costs are reflected in the price index, it can sufficiently reflect housing costs, which account for the largest share of household consumption expenditure, thereby increasing the representativeness and realism of consumer prices," adding, "If the burden of housing costs is not properly reflected, communication by policy authorities may become difficult due to the gap between the indicator prices and perceived prices."

In fact, although estimation methods vary slightly, major countries such as the United States, Japan, Switzerland, Sweden, Canada, Australia, and New Zealand reflect the burden of owner-occupied housing costs in prices. However, Korea only reflects housing rental fees in prices and does not reflect owner-occupied housing costs.

However, there are clearly constraints when reflecting owner-occupied housing costs in prices. Lee said, "Depending on the estimation method, the estimated value of owner-occupied housing costs can vary greatly, and it may be difficult to obtain the basic data needed for estimation in a timely manner, and reflecting owner-occupied housing costs may increase the volatility of consumer prices."

Additionally, the Bank of Korea noted that there are large differences between estimates depending on the measurement method of owner-occupied housing costs, and if heavily influenced by interest rates, there is a possibility that monetary policy intentions and prices could move in opposite directions.

Furthermore, it added, "Consumer prices are not only an inflation indicator but are also used as a reference for other national policies such as National Pension payments and minimum wage determination, so whether owner-occupied housing costs are reflected in consumer prices requires broader and comprehensive review and discussion."

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