[News Terms] 'Deleveraging'... Increased Burden on Vulnerable Groups

Bank of Korea Forecasts Further Decline in Housing Prices
Points to Debt Reduction as a Deepening Factor

On the 9th, the Bank of Korea stated in its 'Recent Risk Assessment Related to the Real Estate Sector' included in the 'Monetary and Credit Policy Report' that considering the elevated interest rate levels, expectations of a decline in housing prices, and the housing market cycle, housing prices are expected to fall further this year. Additionally, it pointed out that the recent simultaneous decline in both sales and jeonse prices could act as factors that slow down the housing market and deepen deleveraging.

Deleveraging refers to the reduction of debt. It means lowering the proportion of debt on the balance sheets of economic agents such as households and companies. Conversely, leverage indicates a higher debt-to-equity ratio when this proportion is high.

From an investment perspective, leverage is an effective investment technique during economic booms because borrowing funds at relatively low interest rates to invest in high-yield areas can generate substantial profits even after repaying the debt. However, during economic downturns, asset values decline sharply, profitability decreases, and interest rates tend to be relatively high, making deleveraging?repaying, restructuring, and reducing debt?an effective investment strategy.

[Image source=Yonhap News]

In a deleveraging situation, the increased principal repayment amount can place a heavier burden on the cash flow of vulnerable groups. During the Great Depression in the United States in the 1930s, economic agents sold off assets in large quantities, causing asset values to fall and consumption to decrease, leading to a vicious cycle of economic recession (debt deflation). This means that deleveraging may involve hardship for economic agents.

Ultimately, deleveraging is a painful process for the private sector experiencing financial difficulties because selling assets cheaply can lead to significant losses. However, from a macroeconomic perspective, deleveraging across the economy means a simultaneous reduction in debt levels in multiple sectors, including the private sector and the government.

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