(Bloomberg) -- South Korea’s bank lending to households rose the most in years last month, offering more evidence that the central bank needs to tread carefully in softening its policy in case such a move rekindles an overheating of the housing market in Seoul.
The value of loans rose by 9.3 trillion won ($6.9 billion) in August from a month earlier in the biggest increase since the summer of 2021, according to Bank of Korea data provided Wednesday. Mortgage loans recorded the biggest jump in data going back to 2004.
Mortgage applications tend to increase after large-scale apartments are built or are about to be completed. A string of high-profile auctions have been held in Seoul this year, including a 114-unit luxury complex in Seoul that drew more than 2 million people, crashing servers, in July.
Authorities have sought to cool the market by tightening lending regulations from this month in the greater Seoul area, and pledging a boost in housing supply. The measures came as the BOK deliberates on the timing for a pivot from its record-long hold of the key interest rate. It currently stands at 3.5%, a level the central bank calls restrictive and necessary to prevent housing bubbles.
In a briefing Wednesday, the BOK said a buying spree in the capital appears to be easing, citing a decrease in purchases and a slowdown in price growth. Government measures may also start to have impact from September, it said. Considering consumers continue to expect home prices to climb and interest rates to fall, the BOK still needs to closely monitor the market, it added.
What Bloomberg Economics Says...
“The jump in bank lending to households in August shows the Bank of Korea can’t let its guard down when it comes to debt risks but this is unlikely to stand in the way of a rate cut, which we still see coming in October.”
-Hyosung Kwon, economist
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Governor Rhee Chang-yong said earlier this month that inflation cooling to the target of 2% paves the way for considering a rate cut, even though financial imbalances still need to be considered. The board meets next month for a decision with the majority of economists anticipating a cut.
“We still see it as a close call, with the risk that rate cuts start in November,” Bum Ki Son, a Barclays Bank economist, said in a note. “Property holds the key.”
Seoul’s apartment market is a vital indicator of financial imbalance as it leads the increase in household loans. Apartments are the most prized real estate asset for South Korean consumers and their price rise in recent months has kept the BOK wary about cutting borrowing costs on fears such a move could amplify household debt loads.
Still, as private spending stays weak and credit risks linger in the construction industry, pressure has been mounting on the BOK to lower its benchmark rate. In an interview this week, South Korea’s land minister Park Sang-woo said a rate cut would help boost regional economies where the level of unsold homes remains elevated.
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