Bank of Korea acknowledges ‘real estate PF risk’, freezes base interest rate at 3.5%

In response to the Taeyoung Construction incident, the Monetary Policy Committee stated, “The PF crisis has increased”
Are you going up to follow the US or down for real estate? Bank of Korea "freezes interest rates"
China's deepening real estate crisis, will Korea follow the same path?

The Bank of Korea mentioned the real estate project financing (PF) crisis originated by Taeyoung Construction. The Bank of Korea froze the base interest rate at 3.5% per annum at the monetary policy direction meeting on the 11th, and assessed in a distributed decision that “PF-related risks have increased.” While sparing the ‘interest rate cut’ card, which is considered a response to the PF crisis, it directly revealed critical awareness of the current situation.

Difficult to lower or raise interest rates, frozen for the 8th consecutive time

The Bank of Korea raised the base interest rate from 1.25% to 1.5% in April 2022, and then raised the base interest rate seven consecutive times to 3.5% in January last year. It was the Monetary Policy Committee in February last year that stopped the sharp rise in the base interest rate. At that time, the Bank of Korea stopped the streak of interest rate increases for the first time in 10 months, and has since frozen interest rates a total of eight times in a row. Even though the interest rate gap with the United States widened to 2%p, the highest ever, they did not take out the interest rate increase card.

Pressure to lower interest rates due to the real estate PF crisis also did not change the Bank of Korea’s decision. Recently, Taeyoung Construction, a construction company ranked 16th in the construction ability evaluation, applied for a workout (corporate structure improvement), raising concerns about poor loans both inside and outside the construction industry. Some predict that the real estate PF problem will spread throughout the economy in the future. Accordingly, while the Bank of Korea is sparing the ‘interest rate cut’ card, it appears to acknowledge the risk of PF risk itself through its decision.

Regarding the background of the decision to freeze the base interest rate, the Bank of Korea said, “Although the inflation rate continues to slow down, it is still at a high level and there is great uncertainty in the outlook, so it is appropriate to maintain the current austerity stance and check domestic and foreign policy conditions.” “I saw it,” he explained. The Monetary Policy Committee said, “We will continue the monetary tightening stance for a sufficiently long period of time until we are confident that the inflation rate will converge to the target level,” and added, “We will monitor growth going forward and ensure that the inflation rate stabilizes at the target level in the medium term.” Meanwhile, we will operate monetary policy while paying attention to financial stability.”

China shaken by ‘real estate bubble burst’, maybe we too?

The construction industry’s insolvency crisis is not just our country’s problem. Countries around the world are suffering from measles due to the ‘real estate crash’ caused by the economic downturn. A representative example is China. In August 2020, the Chinese government proposed ‘three red lines’ to reduce the debt ratio and increase the cash holding ratio of large real estate companies to ensure a soft landing in the real estate market. However, large Chinese real estate development companies such as Hengda Group, which failed to reduce their debt in a short period of time, defaulted on their loans, and the overall real estate market began to shake.

As development companies faced with financial difficulties were unable to begin construction, cases of ‘indefinite postponement’ of moving into new apartments continued to appear everywhere. Prospective tenants, angry at the lack of promise, recently began a movement to refuse repayment, saying, “We will no longer pay long-term mortgage loans.” Currently, it is known that there are about 300 apartment complexes nationwide that have begun collective refusal to repay. Their refusal to repay loans threatens to lead to the failure of local commercial banks. This means that there is a risk that the construction industry’s insolvency could spread to a financial crisis.

To overcome the crisis, China lowered lending interest rates one after another in April, May, and August last year. In November of the same year, the bank reserve ratio was cut by 0.25%, releasing liquidity worth 500 billion yuan (about 93 trillion won) into the market. While the real estate PF crisis in the domestic market has intensified due to the Taeyoung Construction incident, some are raising concerns that Korea, which has close ties with China, will also follow a similar path to the Chinese real estate market.