BOK: "Real Estate Debt Increases by 100 Trillion Won Annually... Incentives Needed for Loans to Innovative Companies"

At the 'Real Estate Credit Concentration' Policy Conference on the 3rd
Real estate credit reaches 1,932.5 trillion won... 49.7% of total private credit
Financial stability risks and weakened economic growth momentum
Regulations should be supplemented to reduce incentives for financial institutions
Incentives for innovative corporate loans need to be strengthened

"Capital regulations should be supplemented to reduce the incentives for financial institutions to handle real estate loans. There is also a need to strengthen incentives for handling productive corporate loans."

Choi Yong-hoon, Director of the Financial Market Department at the Bank of Korea, is presenting at the "Bank of Korea-Financial Research Institute Joint Policy Conference" held on the afternoon of the 3rd at the Bankers' Hall in Jung-gu, Seoul. Bank of Korea

On the 3rd, Choi Yong-hoon, Director of the Financial Market Department at the Bank of Korea, stated at the policy conference titled 'Real Estate Credit Concentration: Current Status, Issues, and Improvement Measures' held at the Bankers' Hall in Jung-gu, Seoul, in his presentation on 'Structural Causes and Issues of Real Estate Credit Concentration,' that "It is necessary to alleviate the concentration of financial institution credit in the real estate sector and to induce smooth capital supply to productive sectors."

As of the end of last year, the scale of real estate credit in South Korea stood at 1,932.5 trillion won, accounting for half (49.7%) of total private credit. It has grown 2.3 times compared to the end of 2013, increasing by about 100 trillion won annually since 2014. By type, the household sector rapidly increased mainly in housing mortgage loans and jeonse loans, including policy mortgages, while the corporate sector saw rapid growth centered on real estate business loans. By financial sector, banks have steadily increased real estate credit mainly in the household sector, while non-bank institutions expanded supply centered on households from 2015 to 2017 and on corporations from 2018 to 2022. Director Choi pointed out, "Excessive credit supply to the real estate sector is not only a risk factor in terms of financial stability but also acts as a negative factor in the macroeconomy by weakening growth momentum."

There are three major problems when credit supply is concentrated in the real estate sector. First, credit supply to productive sectors is limited (inefficient allocation of resources), which likely lowers growth contribution; second, financial system stability may deteriorate; and third, the competitiveness of the financial industry may weaken. Director Choi said, "If credit concentration occurs in real estate, capital productivity declines and consumption contracts, which can limit economic growth," adding, "In the event of domestic and external shocks, a sharp drop in real estate prices and rapid deleveraging (debt reduction) may occur, intensifying financial system risks and contraction of the real economy." He also warned that if financial institutions become complacent with the continuous expansion of real estate credit and neglect efforts to diversify operations and innovate financially, the competitiveness of the domestic financial industry will also weaken.

The structural causes of real estate credit concentration include ▲ the demand for funds concentrated on real estate investment by households and corporations and ▲ the interest income-centered business structure of financial institutions. It was also pointed out that the incentive system from the regulatory side, such as low capital charges on real estate loans, plays a role.

On the demand side, households continue to prefer real estate-centered assets, and expectations of rising housing prices induce leveraged housing investments. On the corporate side, the real estate market has shown favorable conditions for a long time, increasing the number of related companies significantly. Due to the characteristics of the real estate and construction industries, there is a high dependence on external funds for initial investment capital, creating a structure that generates large loan demand.

On the supply side, banks use the expansion of real estate-collateralized loan assets, which can secure stable profits, as their main business strategy due to their profit structure highly dependent on interest income. Non-bank institutions expanded real estate-related corporate loans, which are relatively less regulated, due to strengthened household loan regulations and the need to secure sources of income. Director Choi evaluated, "From the perspective of policy finance, housing-related policy finance has been steadily supplied, and the loan requirements are more relaxed compared to bank products, which has contributed to the increase in real estate credit."

From the regulatory perspective, under the Bank for International Settlements (BIS) capital regulations, the capital charge burden for real estate-collateralized loans is lower than for other loans, giving banks an incentive to prioritize housing mortgage loans and real estate business loans.

Director Choi said, "To alleviate the concentration of financial institution credit in the real estate sector and induce smooth capital supply to productive sectors, in the short term, the increase in real estate credit should be managed within an appropriate level. In the medium to long term, capital regulations should be supplemented to suppress financial institutions' incentives to handle real estate loans. It is also necessary to consider strengthening incentives for handling productive corporate loans." He added, "Looking further ahead, the overall credit supply system, including housing finance, should be restructured."

Meanwhile, the real estate credit mentioned in the presentation refers to the amount of credit supplied by financial institutions to the real estate sector. It is calculated as the sum of household real estate loans, including housing-related loans and non-housing real estate collateral loans, and corporate loans in the real estate and construction industries, such as project financing (PF) loans. General corporate real estate-collateralized loans outside the real estate and construction industries were excluded, considering their potential use in productive sectors. Therefore, it differs from the 'real estate-related loans' within the real estate finance exposure disclosed in the Bank of Korea's financial stability report last month.

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