The Bank of Korea warns surging home prices may fuel debt and threaten financial stability

South Korea's Central Bank Issues Warning: Rising House Prices and Debt Accumulation Threaten Financial Stability

On Wednesday, South Korea's central bank released its semi-annual Financial Stability Report, indicating that the continued rise in house prices in Seoul and surrounding areas is becoming a potential instability factor for the financial system. The central bank noted that although the economic fundamentals appear sound, the ongoing increase in real estate prices is prompting rapid accumulation of household and corporate debt, thereby increasing systemic financial risk.

The report specifically mentioned that if the housing market's upward trend continues, it could trigger a further rise in residential leverage, increasing debt repayment pressures, and posing a challenge to the credit stability of the banking system. Given the current context of unsteady economic growth, this risk warrants close attention.

The central bank emphasized that this trend of rising debt is not limited to home purchase loans but also includes other forms of consumer credit and corporate financing, showing a tendency to spread through multiple channels.

Financial Vulnerability Under Political and External Shocks

In the report, South Korea's central bank also mentioned that despite facing dual challenges of internal political turmoil and external trade frictions in the first half of 2025, the financial system overall remains robust. Particularly, in the wake of the leadership vacuum following the former president's impeachment and the imposition of tariffs on South Korean goods by the Trump administration, market uncertainty surged temporarily.

The report noted that during this phase, financial market volatility intensified, with short-term selling pressure especially visible in the foreign exchange and stock markets. However, thanks to a sound financial regulatory system and market buffering mechanisms, the South Korean banking system has maintained stability across most key indicators.

Nevertheless, the central bank warned that with ongoing changes in the external environment, particularly the uncertain trajectory of U.S.-Korea trade relations and global interest rate paths, South Korea's financial market could be exposed to a broader range of systemic shocks.

Mid to Long-term Risks: Housing Market, Debt, and Policy Coordination

In the report, South Korea's central bank further urged the government and financial regulatory bodies to enhance macro-prudential policy coordination, especially in managing real estate credit, to prevent housing market bubbles from accumulating. There is also a need to strengthen oversight of high-risk borrowers to avoid excessive financing spurred by rising house prices.

Additionally, the central bank suggested that future policy formulation must consider changes in household debt structure, the regional concentration of real estate credit, and the potential conflicts between monetary policy and financial stability goals. The report stated: "A current policy overly skewed towards supporting the housing market may be counterproductive."

Continued Focus on Financial Resilience and Global Variables

Finally, the South Korean central bank stressed that despite the current resilience of the financial system, the dual pressures of real estate and debt should not be ignored as they could evolve into a widespread financial instability risk. Moving forward, there will be close monitoring of the asset and liability performance of household and corporate sectors, with regulatory frameworks adjusted flexibly according to global macroeconomic trends.

Investors and policymakers are reminded to stay vigilant, especially in the face of global geopolitical uncertainties and the potential capital outflow pressure caused by the Federal Reserve's policy directions, ensuring the healthy operation of the financial system.

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

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