"Real Estate Prices Hit All-Time High"... Real Estate-Driven Economic Recession Warning (Comprehensive)

Bank of Korea's 'Financial Stability Report'
Real Estate Risk Index 'Worst Ever'
Real Estate Prices and Income Gap Worsen Most
Household and Corporate Debt at Record High, 2.2 Times GDP

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

[Asia Economy Reporter Jang Sehee] The real estate financial vulnerability index, which indicates the gap between real estate prices and income, has reached a critical level. This means that more debt has been poured into real estate purchases. In the third quarter, private sector debt, including households and corporations, soared to 3,343 trillion won, 2.2 times the gross domestic product (GDP), resulting in an especially severe concentration of funds in real estate. The Bank of Korea forecasted that if domestic and international shocks such as base interest rate hikes occur, the scale of household loan defaults could approach 10 trillion won.

According to the Bank of Korea’s “December 2021 Financial Stability Report” released on the 23rd, the real estate financial vulnerability index (FVI) stood at 100, marking the highest level since statistics began in 1996. This index sets the highest point at 100 and the lowest at 0, showing how much asset prices have risen relative to the real economy, meaning the gap with income has widened to the maximum. 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 in the first, second, and third quarters of this year.

The real estate sector index is calculated considering the ratio of housing prices to income, housing price growth rate, and the rent increase rate of medium-to-large commercial properties. This indicates that prices of all real estate, including housing and commercial properties, have peaked. A Bank of Korea official explained, “If housing prices rise sharply compared to income, the probability of an economic recession due to real estate-related debt increases.”

The rise in the real estate vulnerability index contrasts with the financial imbalance indices for bonds and stocks, which both decreased compared to the second quarter. The bond index fell from 62.3 in the second quarter to 60.7 in the third quarter, and the stock index dropped from 54.0 to 50.7 during the same period. This indicates that the flow of funds into the real estate market remained strong.

The Bank of Korea expects that if external shocks such as base interest rate hikes and financial imbalances in major countries occur, difficulties in debt repayment will increase and asset price adjustments may take place.

Professor Andonghyun of Seoul National University’s Department of Economics emphasized, “Since the burden of loan repayment may increase in the future, it is necessary to prepare in advance, such as by switching to fixed-rate loans.”

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