^{This photo taken on Nov. 24, 2022 shows the building of Bank of Korea BOK in Seoul, South Korea. | Wang Yiliang | Xinhua News Agency | Getty Images}

South Korea’s Central Bank Freezes Rates as It Grapples with Housing Market Turbulence

The Bank of Korea (BOK) opted to maintain its benchmark interest rate at 2.5% during its latest policy meeting, as officials weigh the growing risks stemming from Seoul’s overheated housing market and surging household debt.

This decision follows the central bank’s earlier rate cut in May and comes amid intensified government efforts to clamp down on speculative borrowing and rein in the country’s rising real estate prices. Financial authorities remain on alert as housing prices in Seoul rose by an alarming 19.3% year-over-year in June, based on data from Goldman Sachs.

Seoul’s Housing Prices Ignite Policy Caution

The BOK flagged a “significant acceleration in housing prices in Seoul and its surrounding regions” in its official statement. The capital’s real estate market has shown signs of overheating, compelling policymakers to take a measured approach.

In response, the government rolled out tighter mortgage lending restrictions to curb speculative borrowing. Analysts, including those at Goldman Sachs, believe these steps have “opened the door” for a potential rate cut at the August meeting — assuming the housing market shows signs of stabilization.

Household Debt Reaches Critical Levels

Household debt remains a central concern for the BOK. In May, total household loans grew by 6 trillion won ($4.27 billion) — the fastest pace since October 2023 — and estimates suggest this figure reached 7 trillion won in June.

Part of the issue lies in South Korea’s unique housing rental model known as jeonse, which requires tenants to deposit between 50% and 80% of a property’s value upfront, interest-free. Most renters finance this with loans, creating systemic financial pressure.

“Jeonse loans significantly add to the burden of household debt in Korea,” said Samuel Rhee, chairman of wealth platform Endowus. “It creates a loop of borrowing that destabilizes financial health.”

The Bigger Economic Picture: Growth, Trade Tensions & Volatility

Despite external economic challenges, including a 0.2% quarter-over-quarter contraction in Q1 GDP and threats from the U.S. to impose 25% tariffs on South Korean imports beginning August 1, the BOK is prioritizing financial stability over growth stimulation.

“Financial stability is an actual mandate for the BOK, unlike many of its global counterparts,” noted Homin Lee, senior macro strategist at Lombard Odier. He added that Governor Rhee Chang Yong has repeatedly voiced concerns about Korea’s debt problem and its broader implications for economic resilience.

While core inflation remains within target and the Korean won has stabilized at around 1,372.48 per dollar, many economists anticipate two rate cuts this year — one each in August and November — before the BOK enters a prolonged pause to monitor household credit trends.

Signs of Cooling – But Risks Remain

There are early signs that the government’s policy measures are beginning to take effect. “The housing market in Seoul and nearby areas, which had shown signs of overheating, appears to be stabilizing somewhat,” the BOK said on Thursday.

Still, the central bank remains cautious about the potential for renewed volatility, particularly in the foreign exchange markets, as global and domestic uncertainties persist.

Final Thoughts

With an overheated property market, rising household debt, and slowing exports, South Korea’s policymakers face a delicate balancing act. While interest rate cuts remain on the horizon, the Bank of Korea is treading carefully — aiming to cool the market without fueling further financial instability. As Seoul’s real estate sector continues to influence broader economic decisions, the next few months will be critical in determining the trajectory of both the housing market and the national economy.