S. Korea held back by housing prices and household debt

The U.S. Federal Reserve (the Fed) announced the possibility of lowering its base rate in September. Jerome Powell, the Chair of the Fed, said lowering the base rate can be discussed in the September meeting if necessary conditions are met during a press conference after announcing the freeze of the base rate at 5.25-5.50 percent on Wednesday. While he mentioned that certain conditions should be met, it was the first time the chair specifically discussed the timing of lowering the base rate. He sent a strong pivot signal as inflation has been consistently slowing down, and the overheated labor market is cooking off in the U.S.

Before the U.S., major countries in Europe and China had already lowered their interest rates as soon as inflation stabilized. Last month, China reduced the loan preferential interest rate, which is equivalent to the country’s base rate, following a rate cut five months ago. The European Central Bank, which lowered interest rate in June, implied a further decrease. Major countries are decreasing their rates in response to a potential economic downturn, except for Japan, which increased its policy rate to prevent super low yen.

Many people are calling for South Korea to join the interest rate-cutting trend in consideration of a decrease in domestic demand and a slowdown in inflation. As the country’s domestic demand further decreased, with its quarterly growth rate in the second quarter falling below zero for the first time in 1.5 years, some are proposing a preemptive rate cut. As the U.S. dollar becomes cheaper due to the Fed’s announcement on interest cut and the won-dollar exchange rate stabilizes, conditions to lower South Korea’s interest rates are being created.

What’s problematic is rising housing prices and soaring household debt. According to the Korea Real Estate Board, apartment prices in Seoul have been increasing for 19 consecutive weeks as of the last week of July, and apartment prices in areas near the capital recorded the largest increase in 45 weeks. Consumer expectations for housing price increases reached a similar level as in 2021, when housing prices soared. The application website was shut down as 2.94 million people applied for homes in Dongtan, Gyeonggi Province, which provides a snapshot of the current real estate market. As the real estate market is overheated, mortgages provided by five major commercial banks, which have already exceeded the annual household debt target, increased by over five trillion won during the last month alone.

A premature decrease in interest rates with such destabilizing factors in place can further intensify a rise in housing prices and household debt, bringing about even a bigger shock to the overall economy. The housing price burden will cause inflation and limit household consumption, slowing the economy. Finding the right pivot timing to boost domestic demand while ensuring efforts to stabilize inflation aren’t wasted is critical. More precise and detailed signals should be sent to the market to stabilize housing prices to avoid holding back a change in the monetary policy.