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A currency trader watches monitors at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea
The prices of houses in the South Korean capital have increased almost 10% in the first half of the yearImage: Ahn Young-joon/AP Photo/picture alliance

Is South Korea's economic bubble threatening to burst?

Julian Ryall
September 2, 2021

Asia’s fourth-largest economy is experiencing soaring real estate prices and busy stock market trading that are raising fears of a correction, but analysts say underlying economic problems are the greater danger.


There are growing concerns that soaring real estate prices, an overheated stock market and worsening household debt in South Korea are combining to create an economic bubble — similar to the situation in Japan in the late 1980s — with the fear that when the bubble bursts, the whole Korean economy will also experience a comparable crash.

Japan's bubble was also rooted in real estate and stock markets. When the Nikkei stock market plummeted to half its previous value, the bubble burst and banks were left holding vast amounts of unrecoverable loans. The following years were known as the "lost decade" for Japan's economy.

Fearful of a similar scenario playing out, South Korea's financial authorities earlier this month requested that local banks reduce the number of unsecured loans they issue in an effort to put a cap on worsening household debt. The total amount owed by Koreans reached a record high of $1.51 trillion (€1.27 trillion) at the end of March, up an alarming 9.5% from one year earlier, according to the Bank of Korea.

New requirements

An effort to slow the growing debt by introducing new requirements for mortgage borrowers was attempted in April. But this failed to reduce demand as property prices continue to rise, primarily in Seoul and suburbs convenient for the capital. With potential buyers fearing they are being priced out of a home, more are taking our ever-larger loans to secure a property.

The average price of an apartment in Seoul increased by $87,000, or 9.7%, in the first six months of the year to reach a total of $977,124.

South Korea home spiraling soaring out of control

Authorities have stepped in to express their concern that a crash could be on the horizon, with Finance Minister Hong Nam-ki warning earlier this month that a "sharper-than-anticipated" correction in prices in the property sector could happen. Lee Ju-yeol, the governor of the Bank of Korea, echoed those fears by called property prices "over-rated."

There has been a similar rush to invest in the stock market, fueled by people taking out loans with record-low interest rates. Both the Kospi and Kosdaq markets have seen new highs in the last 18 months. Sensing that the risk was worsening, commercial lenders have suspended new loans for securities investments.

These relatively new issues are even more perturbing when coupled with the nation's fundamental economic problems: worryingly high levels of youth unemployment, a soaring national debt, and both the manufacturing sector and heavy industries witnessing declining fortunes.

And while analysts agree that soaring property prices and frenzied investing in the stock market need to be monitored, they say these systemic issues pose a far more significant risk to the nation's economic health.

Danger ‘over-stated'

"I have seen the reports about an economic bubble in Korea and the possibility of it bursting, but I think the danger is over-stated and the situation is not comparable to Japan's experiences in the 1990s," said Park Saing-in, an economist at Seoul National University.

"The biggest difference is that the bubble in Japan was in the commercial building sector, while here the growth in prices has been in the residential building sector," he told DW. "And while property prices are high in Korea, it's a similar situation around the world because of low-interest rates since 2018."

Bright neon lights at night along a street in the South Korean capital Seoul
Some economists have played down the concerns over a possible economic crashImage: Yonhap/picture alliance

Indeed, the government has the tools at its disposal to deal with any challenges to the property market and is able to "control household debt very tightly," Park said, although he added that he does have concerns about other elements of the national economy.

"The biggest worry has to be the manufacturing sector, with traditional businesses now increasingly losing out to China, the US and even European countries," he said. "We have also seen rapid change in terms of the digital transformation and traditional sectors are very vulnerable to huge changes like that."

Problems in manufacturing — such as the auto sector, steel and shipbuilding — will inevitably have knock-on implications for employment. Even areas such as semiconductor manufacturing, where South Korea has traditionally been a world leader, are struggling to keep up with foreign competitors, Park added. 

Consumers' perspective

June Park, a political economist at George Washington University, concurs that the bubble in the property sector is unlikely to burst but that measures do need to be taken from a consumer's perspective to halt the rapid rise in prices and enable people to buy a home.

Smart cities for the future

"The authorities see the situation as an over-heating of the economy because people are borrowing so much for properties, and the fear is that they will not be able to pay those loans back," she said. "I agree that the government needs to act to stop the market over-heating, but whatever actions are taken I do not see prices leveling off in the near future, even if there is a new government after the election next year because it takes time to fix these issues."

June Park says the government needs to focus its attention on creating more jobs for the younger generations and be prepared to move away from the "fixation” on the manufacturing sector of the past.

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