Housing Prices and Household Debt Swell Again, Piling Up Financial Imbalances
As housing prices and household debt grow again, indicators of financial imbalance are flashing warning signs. According to the Bank of Korea's Financial Stability Report, the Financial Vulnerability Index, which measures the potential for distress across the financial system, rose for the ninth consecutive quarter to 46.5 at the end of the second quarter, climbing above its long-term average line. During the same period, household credit, including household loans, exceeded 2,000 trillion won for the first time. That said, not all indicators have worsened.
The conditions for selling are also narrowing. If Seoul housing prices continue rising at the current pace, fewer than 9 out of 100 multi-homeowner households looking to sell would actually succeed, according to findings.
Amid this, the Bank of Korea is wary of a possible resurgence in housing loans, as its target for managing household loan growth has been raised. Senior Deputy Governor Jang Jeong-soo said that although the household debt ratio could fall to or below critical levels, he remains firm in the view that the framework for managing household debt must be maintained.
Raising interest rates to rein in the overheating also carries a burden. A 0.25 percentage point hike in the base rate would add roughly 7 trillion won in additional interest costs for households and businesses. The shock starts with the most vulnerable. In past rate-hike cycles, the delinquency rates of vulnerable households and small and medium-sized enterprises responded most strongly about nine months later. The delinquency rate for vulnerable self-employed borrowers has already risen above 12 percent, and companies on the brink of being unable to cover interest payments now approach one in five among firms subject to external audits.
In its Financial Stability Report, the Bank of Korea presented the policy task of reducing financial imbalances while minimizing the side effects that emerge in the process.
