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South Korean policymakers are struggling to stimulate economic growth in the face of an escalating global trade war, as they fear cutting interest rates could boost property prices in some of the most desirable parts of Seoul and inflame an already overheated market.
The Bank of Korea on Thursday held rates at 2.5 per cent, defying pressure to support an economy that contracted in the first quarter as US President Donald Trump’s tariffs squeezed the country’s crucial exports of cars, steel and electronics.
“The BoK wants to cut rates to boost the economy, but it is concerned that lower rates will create bubbles in the property market, hurting financial stability,” said Park Chong-hoon, head of research at Standard Chartered in Seoul. “The runaway property market in Seoul and high household debt are limiting their policy options.”
South Korea’s new leftwing President Lee Jae Myung has pledged to revive the economy following a prolonged period of slowing growth. The economy also faces US tariffs, competition from low-cost Chinese exporters and political turmoil following the impeachment of Lee’s conservative predecessor, Yoon Suk Yeol.
BoK governor Rhee Chang-yong warned on Thursday that house prices had reached a “critical point in deterring consumption and economic growth”. He added that Trump’s tariffs could further damage South Korea’s growth prospects.
“The worst-case scenario will be that tariffs go up while property prices go out of control,” Rhee told reporters.
Trump reiterated this week that South Korea would face a blanket 25 per cent tariff on its exports if it failed to reach a trade deal by August 1. Factory activity in South Korea has already contracted for five consecutive months through June.
Last week, Lee’s ruling Democratic party passed a $23bn fiscal stimulus package, including the distribution of cash vouchers ranging in value from $110-$410 to all South Koreans.
But economists say deeper structural reforms are needed to address slowing productivity and a looming demographic crisis. The OECD this month forecast a potential growth rate for 2025 of less than 2 per cent for the first time since 2001.
Rhee last month acknowledged the difficulty of stimulating growth without overheating the property market, saying that “excessively lowering the base rate would likely fuel housing price hikes in the Seoul metropolitan area, rather than support a recovery in the real economy”.
Last month, Nomura warned that the looser financial conditions driving the housing market rally were contributing to rising household debt, which at Won1,927.3tn ($1.3tn) last year was 92 per cent of GDP, one of the highest in the developed world.
“With overheated housing markets in Seoul and rising household leverage testing the BoK’s tolerance for financial imbalances, we expect the BoK to quickly shift its policy focus back towards financial stability,” Park Jeong-woo, an economist at Nomura, said in the report.
Led by the upscale southern districts in Gangnam, prices surged last month at their highest weekly rate in nearly seven years, matching the pace of growth during a previous boom in 2018, even as the market remains stagnant in areas outside Seoul.
The BoK said on Wednesday that housing loans in June had risen by $4.5bn — the biggest jump in nine months — with lending growing by more than 4 per cent year on year in each of the past four months.
Lee wants to encourage Koreans to invest in the stock market instead of property, telling reporters he was “determined to reverse the speculative forces that are distorting the housing market”. His government has already rolled out measures aimed at cooling prices, including a Won600mn mortgage cap and tightened lending rules.
But Park of Standard Chartered cautioned that any gains from the stock market would flow back into property, “as Koreans have strong faith that property investments are much safer than stock investments”.
Stabilising the property market is critical for the new government. Runaway prices in metropolitan Seoul are widely seen as having contributed to the Democratic party’s loss in previous presidential elections in 2022.
One of the biggest failures of the previous leftwing administration “was its inability to rein in the skyrocketing property market in Seoul”, said Shin Yul, a professor of politics at Myongji University. “You can’t stabilise the property market by just trying to curb demand without increasing supply.”
Many South Koreans remain determined to put their money in housing.
“People believe that property prices will go up again because they have always done so under the previous liberal governments,” said Nomura’s Park. “There is fear that this may be their last chance to buy a house, given the current supply shortages in Seoul. Many of them are still convinced that property investments never fail.”