Apartment complexes in Seoul, June 9 / Newsis

Koreans expect housing prices to increase over the next year, driven by continued increases in the capital area, according to data from the Bank of Korea (BOK) released Tuesday.

The anticipation could hinder the government's efforts to curb rising household debt, which reached a record high in the second quarter of this year. Market watchers suggest the need for a more refined policy approach, rather than relying solely on raising loan rates.

According to the BOK, Tuesday, the housing price outlook index for August rose by three points to 118, reaching its highest level since October 2021 when the housing market was booming.

The index reflects consumer expectations for housing prices one year into the future relative to current levels. A reading above 100 indicates that more consumers expect prices to rise than fall.

The BOK attributed the growing expectations to the continued increase in apartment sales and price hikes, especially in the capital region.

Such public expectations are likely to pose additional challenges to the government and the BOK in formulating policies to manage household debt.

Kim Min-su, center, head of the Bank of Korea (BOK) monetary & financial statistics team, speaks during a press conference at BOK headquarters in Seoul, Tuesday. Courtesy of the BOK

People are still rushing to secure household loans despite the government exerting influence over commercial banks. The top five domestic banks have raised loan rates 20 times in the last two months.

This led the amount of household loans to reach 1,780 trillion won ($1.3 trillion) in the second quarter of this year, according to separate data of the BOK released on Tuesday. This is an increase of 13.5 trillion won compared to the previous quarter.

The trend is also complicating the BOK's decision on a rate cut, despite growing pressure from weak domestic demand. Markets expect the BOK to hold rates steady at Thursday's committee meeting, citing concerns over rising debt levels.

With no signs of slowing, Financial Services Commission Chairman Kim Byoung-hwan held a meeting with local bank heads on Tuesday, during which he announced that loan regulations in the capital region will be tightened further under the second phase of the stressed debt service ratio (DSR) rules starting in September.

Financial Services Commission Chairman Kim Byoung-hwan speaks during a meeting with local bank heads at the Korea Federation of Banks headquarters in Seoul, Tuesday. Yonhap

The DSR measures a borrower's payment of principal and interest as a proportion of their annual income. Adopting the rule results in smaller loans being offered. The first stage of the rule was implemented in February. Under the tightened second-phase rules, the maximum amount of mortgage that a person with a 50 million won annual salary can get in the Seoul metropolitan area will be slashed by 42 million won to 287 million won.

Bank-led increases in loan interest rates are insufficient to curb household lending, as housing purchase sentiment continues to grow, according to market watchers.

"With the implementation of the stress DSR on the horizon, current measures are focused primarily on managing loans through interest rate hikes," a banking industry official said. "If household loans continue to increase even after the regulation takes effect, more stringent measures should be introduced."

The BOK assured that the trend is under control.

"The government and the BOK share a consensus on managing household debt by controlling its growth rate to remain within the nominal GDP growth rate, rather than pursuing a rapid reduction," said Kim Min-su, head of the BOK's monetary & financial statistics team.

Referring to the government's policies, such as the housing supply expansion announced on Aug. 8, Kim added, "Given the lag in policy effects, it will be important to monitor the policies' impact over time."