[Geuman Report] Real Estate Financial Vulnerability at 'All-Time High'... Asset Price Adjustment Coming

The Bank of Korea Releases Financial Stability Report for December 2021

Real estate stock photo / Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Jang Sehee] In the third quarter of this year, the financial vulnerability index (FV) for the real estate sector recorded an all-time high. This was due to a sharp rise in real estate prices compared to the real economy, resulting in a very high index level. Concerns have been raised that if asset prices undergo adjustments due to domestic interest rate hikes and financial imbalances in major countries, the shock caused by elevated prices could become even greater.

According to the "December 2021 Financial Stability Report" released by the Bank of Korea on the 23rd, the real estate sector index within the financial vulnerability index (FVI) reached 100, marking the highest level since statistics began in 1996. This index sets the highest value at 100 and the lowest at 0, indicating how much asset prices have risen relative to the real economy. According to the Bank of Korea, the index was only 82.1 in the first quarter of last year, rose to 90 in the third quarter, and has continued to increase through the first, second, and third quarters of this year.

The real estate sector index is calculated by considering the ratio of housing prices to income, housing price growth rate, and the increase in rents for medium to large commercial properties. This means that all real estate, including housing and commercial properties, has reached a peak.

On the other hand, the financial imbalance index for bonds and stocks recorded 60.7 in the third quarter, down from 62.3 in the second quarter. The financial vulnerability index also showed a slight decline due to strengthened regulations by authorities.

If interest rate hikes and external shocks from financial imbalances in major countries occur in the future, asset price adjustments may take place.

Professor Andonghyun of Seoul National University’s Department of Economics stated, "Some people already believe that real estate prices have peaked, and prices in some areas are falling," adding, "If additional interest rate hikes and regulatory effects combine, a correction of around 20% could easily happen." He emphasized, "Since the burden of loan repayments may increase in the future, it is necessary to prepare in advance by switching to fixed-rate loans, among other measures."

Meanwhile, the Bank of Korea also analyzed that if rapid financial imbalances occur, it could lead to asset price and debt deleveraging in South Korea.

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