[BOK Focus] Bank of Korea: "House Prices Need to Fall Further... DSR Also Required for Jeonse Loans"

Real Estate at a Crossroads of 'Decline and Rebound'... Bank of Korea Also Sets Double Targets
Recent Household Debt Increase Alarming... Closely Monitoring
Considering Household Debt, 'Gradual Decline' Should Be Maintained
Bank of Korea "DSR Application Needed for Jeonse Loan Too"

Bank of Korea Governor Lee Chang-yong is answering questions from the press at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul, on the morning of February 23.
[Image source=Yonhap News]

As the recent downward trend in housing prices has paused and mortgage loans have started to increase again, the perception of a 'real estate bottom' is gradually growing. The focus of the Bank of Korea, which monitors the domestic financial stability situation, is also rapidly shifting from concerns about a 'hard landing in real estate' to worries about a 'housing price rebound.' This is interpreted as closely watching the possibility that housing prices will soon reverse into an upward trend faster than expected, leading to an expansion in household loans.

Time to Stop Worrying About a Hard Landing in Real Estate... Bank of Korea Focuses on Rebound Rather Than Decline

According to the Financial Stability Report released by the Bank of Korea on the 21st, the future real estate market faces coexistence of concerns over disruptions in returning jeonse deposits due to sharp declines in sales and jeonse prices, risks of real estate project financing (PF) defaults, and worries about increased household loans due to a housing price rebound. A Bank of Korea official said, "Since the real estate rebound came faster than expected in April and May, leading to an increase in household loans, the report has become a double target (rise and fall) rather than a single target."

This indicates that the recent real estate market situation is complex and difficult to forecast. However, internally, the Bank of Korea places more emphasis on the recent real estate market rebound and the resulting increase in household debt. Looking at the first quarter alone, the rapid decline in housing prices is slowing down, so the time to worry about a hard landing has passed. According to the Korea Real Estate Board, the nationwide apartment price growth rates were -1.09% in March, -0.62% in April, and -0.23% in May, showing a rapid recovery.

[Image source=Yonhap News]

Real Estate Prices: A Gradual Decline Is Desirable for the Time Being

That said, the Bank of Korea does not expect housing prices to rise immediately. Rather, it is highly likely that a gradual decline will continue for the time being, and the Bank of Korea considers this desirable. At a press conference on the 19th, Lee Chang-yong, Governor of the Bank of Korea, said, "Although the decline is slowing recently, it is premature to say that the real estate market is recovering at this point," adding, "It is not a situation where housing prices will rise quickly."

The Bank of Korea explained that an 'orderly' price adjustment is desirable. Regarding this, a Bank of Korea official said, "The rapid surge in real estate prices over the past 2-3 years needs to be somewhat corrected, and household debt should also decrease," adding, "If housing prices maintain a gentle downward slope, it can be seen as an orderly adjustment." Despite the recent sharp drop in housing prices, the previous government's surge has not been fully reversed, so there is a need for further decline.

Bank of Korea: "DSR Should Be Applied to Jeonse Loans"

Neither the government nor the Bank of Korea has an official stance on how much further housing prices should fall, but the general consensus is that the household debt-to-GDP ratio, currently exceeding 100%, should be reduced to around 80%. When housing prices fall, tenants' housing cost burdens decrease, demand for jeonse loans weakens, and household debt can gradually shrink. According to the Bank for International Settlements (BIS) standards, South Korea's household debt ranking is close to third highest in the world.

Consequently, opinions between the Bank of Korea and the government differ on some loan regulations. Since December last year, the Bank of Korea has advocated for applying the Debt Service Ratio (DSR) regulation to jeonse loans, but the government is opposed. Currently, jeonse loans are not subject to DSR regulations unlike mortgage loans, which has led to criticism that it causes a surge in household debt. The Bank of Korea included the need to expand DSR even during the jeonse price decline phase in last year's Financial Stability Report.

On the other hand, the government argues that including jeonse deposits in DSR calculations would make it practically impossible for tenants to obtain other loans, so expanding the regulation is difficult. Instead, as jeonse prices have recently fallen, the government is easing regulations by temporarily relaxing DSR regulations on landlords for one year solely for the purpose of returning tenant deposits. The Bank of Korea also said that targeted easing is possible, but strengthening overall DSR on jeonse loans is "a sufficiently necessary alternative."

In front of a real estate agency in Seoul [Image source=Yonhap News]

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