Bank of Korea warns of housing, debt risks as easing continues

Persistent housing price gains, particularly in the Seoul metropolitan area, could accelerate debt accumulation in South Korea and pose risks to financial stability, threatening a financial system that generally held up well in the face of prolonged political turmoil and US tariffs.

In a semi-annual report on the financial system on Wednesday (Jun 25), the Bank of Korea (BOK) said the system remained largely stable in the first half of 2025, despite heightened volatility in financial and foreign exchange markets. The period was marked by elevated political uncertainty stemming from a leadership vacuum following former president Yoon Suk-yeol’s impeachment, as well as ongoing trade tensions with the Trump administration.

At the same time, the central bank sounded alarms over stability as soaring home prices and growing household debt collide with the ongoing rate-cutting cycle, in a warning that highlights a dilemma for the BOK: how to support growth in a slowing economy without triggering a property boom like those seen during previous easing cycles.

“The BOK considers both growth and inflation when setting interest rate policy, but we have to also take financial stability into account, including household debt and housing prices,” Chang Cheong Soo, director general of the financial stability department, told reporters on Wednesday. “Given recent trends in housing prices and household debt, it’s inevitable that these concerns will take on even greater importance.”

Governor Rhee Chang-yong has repeatedly cautioned that cutting rates too quickly could spur a rebound in household debt.

The central bank said the housing market is diverging between Seoul and the rest of the country – a concern it has repeatedly flagged. While non-capital regions have seen stagnant or falling prices, home values in Seoul have jumped more than 16 per cent between January 2023 and April 2025, fuelling a sharp rise in demand and speculative sentiment.

South Korea’s housing price outlook in June jumped to the highest level since October 2021 during the height of the most recent property boom, according to data from the BOK. The index has increased for four consecutive months.

The central bank also flagged rising delinquency rates among borrowers, particularly small businesses, as a growing concern for non-bank lenders. While systemic risks remain manageable, the BOK emphasised the need for stronger coordination between monetary and macroprudential policies. BLOOMBERG