Falling house prices are expected to affect consumer spending and employment: BOK

A sharp drop in house prices in South Korea could deal a major blow to the country’s consumer spending and the labor market amid high household debt, a central bank report revealed on Tuesday.

Consumer spending and the employment rate could both fall by 4% over the next two years if the median house price drops 20% over the same period, according to Bank of Korea calculations.

The calculation adopted a high loan-to-value ratio of 75% and referred to the median decline in house prices of 17.7% between April and September 1998, when the Korean economy was rocked by the Asian financial crisis of 1997.

If house prices increased by 20%, the employment rate would increase by only 1 or 2%, according to the report. The figures suggest that a fall in house prices would be more damaging to society, compared to all the positive effects that come from a rise in prices.

The BOK explained that if Korea’s average LTV ratio rose to 46% at the end of last year, a sharp drop in house prices is likely to cause the ratio to rise suddenly. The ratio has hovered at the current level due to the rise in the median house price in the country, he added.

At the end of 2020, the average LTV ratio here stood at around 46%, while the ratio exceeding 75% was 2% of the pie.

“If the country’s house prices continue to soar, the risk of a price correction becomes greater, which will likely put pressure on our economy,” a BOK official said at a briefing.

“Correcting house prices amid a snowballing trend in household debt could lead to more negative results,” the official added.

The report comes after BOK Governor Lee Ju-yeol expressed concerns about the country’s overheated housing market following the latest monetary policy meeting held last week.

“The price of housing in Korea is extremely overvalued right now,” Lee said.

“The problem here is that the rise in prices is closely linked to the growing household debt of the country,” he added.

Korean household debt reached 1.765 trillion won ($ 1.55 trillion) in March, including 931 trillion won in mortgages. The BOK’s decision last year to cut its benchmark interest rate by 75 basis points to a record 0.5% has encouraged households to borrow more from banks.

Statistics Korea data showed that in June, the average selling price of a small apartment in Seoul jumped nearly 100 million won from December last year to some 1.1 billion won. won, gaining around 10% over the period.

Soaring real estate prices in the South Korean capital have pushed more residents to seek more affordable apartments further afield. On average, 8,823 people left Seoul each month between January and May, according to the same data.

The number of people employed reached 27.6 million last month, 582,000 more than a year earlier, according to separate data released by Statistics Korea last week.

By Jung Min-kyung ([email protected])

Julio V. Miller

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