The Bank of Korea argued that capital regulations should be supplemented to alleviate the phenomenon of real estate concentration in private credit. It advised strengthening incentives for financial institutions to increase loans to corporations with high capital productivity and restructuring the overall credit supply system, including policy loans.
On the 3rd, the Bank of Korea presented a report titled 'Structural Causes and Issues of Real Estate Credit Concentration' during the conference 'Concentration of Real Estate Credit: Current Status, Issues, and Improvement Measures' held at the Bank Hall.
According to the Bank of Korea, the size of real estate credit in South Korea was 1,932.5 trillion won as of the end of last year, accounting for 49.7% of total private credit. Real estate credit refers to the amount of credit supplied by financial institutions to the real estate sector, calculated as the sum of household real estate loans (housing-related loans + non-housing real estate secured loans) and loans to corporations in the real estate and construction sectors.
Since 2014, real estate credit has increased by an average of 100.5 trillion won per year, expanding 2.3 times compared to the end of 2013. In particular, the growth was sharp during 2015-2016 and 2020-2021, while it has somewhat slowed since 2022, but it continues to show significant growth compared to other institutional sectors.
By type, real estate credit in the household sector, including policy loans, expanded focusing on home mortgage loans and jeonse (key money) loans. By industry, the banking sector focused on the household sector, while the non-banking sector concentrated on the corporations sector.
The Bank of Korea expressed concern that the concentration of credit in real estate could lower capital productivity and limit economic growth. The real estate sector has low capital productivity, and as credit becomes more concentrated, the supply of credit to higher productivity sectors slows down, which could decrease the overall value-added creation effect.
In particular, when domestic and external shocks occur, real estate prices may plunge sharply, leading to rapid deleveraging. A decline in the collateral value of real estate could worsen the financial health of institutions, resulting in reduced credit supply and constraining private consumption and investment.
The issue is that it is not easy for financial institutions to reduce real estate loans. Real estate offers higher long-term returns compared to other assets, and because it is relatively less risky than corporate loans, it has become a good source of revenue for banks seeking stable returns.
The Bank of Korea advised that to alleviate the concentration of financial institution credit in the real estate sector and to encourage smooth funds supply to productive sectors, the growth rate of real estate credit should be managed within an appropriate level in the short term.
It continued to note that it is necessary to supplement capital regulations so that financial institutions' incentives for real estate loans can be suppressed and to strengthen incentives for productive corporations' loans. In the medium to long term, it emphasized that the overall credit supply system, including housing finance, needs to be restructured.