Korean Housing Market Overpriced Relative to Income: Concerns Raised by Central Bank

The Central Bank of Korea expresses concern over the overvaluation of the housing market in relation to income. With a house price-to-income ratio of 26, it would take the average worker 26 years to save for a 90 m2 house. Learn more about the challenges in the Korean housing market.

The Central Bank of Korea (BoK) recently expressed its concern regarding the overvaluation of the housing market in Korea, in relation to the income of the people. According to its quarterly report to Congress, the BoK highlighted that the house price-to-income ratio has reached 26. This implies that the average worker would need to save their entire salary for a staggering 26 years in order to be able to afford a house with an average area of 90 m2.

Compared to previous years, this ratio has shown a significant increase. In 2019, it stood at 17.6, followed by 17.4 in 2020, 23.6 in 2021, and a worrying 29.4 in 2022. The BoK report clearly states that despite income levels, housing prices remain consistently high, suggesting that they do not align with the underlying economic conditions.

Since April of this year, there has been a steady increase in household loans issued by banks, and this trend has raised concerns among financial experts. In just five months, loan amounts have risen by more than 25,000 billion won ($18.8 billion), with residential mortgages being a primary contributor. Furthermore, it is predicted that household loans will continue to rise in the short term during the second half of this year, as trading activity rebounds.

The BoK report emphasizes that unlike major economies, South Korea has experienced a continuous increase in household debt without any significant reduction. This growing debt burden has now reached a critical level that threatens both financial and microeconomic stability. Excessive levels of household debt are detrimental to the Korean economy, hindering long-term growth and exacerbating wealth inequality.

In order to tackle this pressing issue, the BoK emphasizes the necessity of coordinated cooperation between financial authorities. It is crucial to sustain efforts aimed at reducing debt in the medium to long term. As a result, the BoK has once again signaled its intention to maintain a tightening stance in policy interest rate management, citing current inflation as a contributing factor. The surge in oil and raw material prices, coupled with other uncertainties, has also been identified as reasons for this approach.

In August, the BoK made the decision to keep the base interest rate at 3.5% for the fifth consecutive time. BoK Governor Rhee Chang-yong further indicated the bank's intention to adopt a tightening monetary policy stance in order to stabilize household loans, protect families, and control inflation.

In conclusion, the Central Bank of Korea (BoK) has raised valid concerns regarding the overvaluation of the housing market in Korea. The house price-to-income ratio remains alarmingly high, and household debt has been steadily increasing without any signs of reduction. The BoK recognizes that excessive levels of household debt pose a significant threat to both financial and microeconomic stability.

In order to address this issue, the BoK emphasizes the necessity of coordinated cooperation between financial authorities. Efforts to reduce debt should be sustained in the medium to long term, and a tightening monetary policy stance is warranted to stabilize household loans and control inflation.