Warning against bubble

Korea faces double whammy of speculation, debt

The Bank of Korea (BOK) has warned of the potential bursting of a housing bubble in Seoul and its surrounding area, as runaway housing prices show no signs of stabilizing. If the bubble bursts and causes a freefall in property prices, this could trigger a financial crisis.

The central bank said the country faces the double whammy of housing speculation and skyrocketing household debt that are amplifying the risk of a financial market collapse. The asset bubble and the ticking debt bomb are highly vulnerable to possible shocks, both internal and external.

Releasing a report on financial stability Tuesday, the BOK said the nation’s house price risk index stood at minus 0.9 percent in the first quarter of this year, its lowest point since the third quarter of 2009. This means housing prices could fall at least 0.9 percent each quarter if the current financial situation continues. The index has remained in negative territory since the first quarter of last year after recording 0.4 percent growth in the fourth quarter of 2019.

The ratio of housing prices over average income jumped by 13 percent at the end of last year from 2019, marking the highest increase among major economies and making it harder for people to buy homes. The U.S., Britain and Germany recorded increases of around 7 percent, according to the BOK.

Apartment prices in Seoul, the country’s capital, have surged 93 percent in the four years since President Moon Jae-in took office in May 2017, according to a report compiled by the Citizens’

Coalition for Economic Justice based on KB Bank data. Household debt skyrocketed to a record high of 1,765 trillion won ($1.55 trillion) in March, up 9.5 percent from the year before.

The BOK said the financial vulnerability index stood at 58.9 in the first quarter of the year, the highest since the fourth quarter of 2008 when it rose to 60 amid the global financial crisis. The index assesses long-term financial risk factors based on financial stability and resilience.

Of particular note, the index showing the risk stemming from the “bubble” prices of assets such as real estate and stocks reached 91.7, close to the 93.1 registered in the second quarter of 1997 just ahead of the Asian financial crisis.

It is rare for the central bank to warn of financial instability in such a strongly worded report. This means the potential risks weighing on the Korean economy have grown although such vulnerability has been overshadowed by booming exports and economic stimulus packages. The report came after BOK Governor Lee Ju-yeol recently hinted at raising the bank’s key interest rate, possibly in the fourth quarter at the latest, amid growing inflationary pressure.

The BOK went on to warn that the economy could contract in the coming years if the country cannot effectively address the property bubble and the debt problem. Now is the time for the authorities to take pre-emptive measures to prevent another financial crisis. No one can overestimate the seriousness of the worsening situation.