Rising Demand for Mortgage Loans Despite Chuseok Holiday: Bank of Korea Faces a Tough Decision on Rate Cuts

September saw persistent demand for new mortgage loans despite a long holiday and various financial regulations.

September saw persistent demand for new mortgage loans despite a long holiday and various financial regulations. While overall household loan balances have slowed, housing-related mortgage loans remain robust, particularly in the capital area. As such, the Bank of Korea (BOK) faces increasing pressure regarding its upcoming decision on whether to cut the base interest rate.

1. Mortgage Loan Trends in September

In September, despite the Chuseok holiday, demand for new mortgage loans in Seoul and the surrounding metropolitan area remained strong. The five major banks reported a total of 7.8 trillion won in new housing-related mortgage loans as of September 26th, with a daily average of 3.41 trillion won. This represents only a 5% decline from August's record-high levels, indicating sustained high loan demand.

Given the nature of housing purchases, many buyers had already scheduled their loan plans in advance, making it difficult for recent regulatory changes to immediately impact mortgage loan volumes. The data suggests that mortgage demand remains strong despite the introduction of stricter debt-to-income (DSR) regulations.

2. Slowdown in Household Loan Balance Growth

However, while mortgage loans have remained resilient, overall household loan growth has noticeably slowed. By September 26th, total household loan balances increased by 4.1 trillion won, only about half of the increase seen in August. Credit loans, in particular, declined by 1.3 trillion won in contrast to the notable increase in August. This reflects the impact of financial authorities’ tighter lending controls.

3. Bank of Korea’s Dilemma on Rate Cuts

These mixed signals complicate the BOK's monetary policy decisions. While housing prices in Seoul continue to rise, the rate of increase has slowed in recent weeks. The long Chuseok holiday likely contributed to the temporary softening of the market, making it difficult to confirm whether this is a lasting trend.

The BOK must balance concerns about domestic economic sluggishness with the risk of continued housing price inflation and household debt growth. Despite a lack of clear stabilization in the housing market, there is growing speculation that the BOK may still opt for a rate cut due to broader economic pressures. Some BOK officials have hinted that waiting for a clear slowdown in debt momentum may not be feasible, considering the challenging economic environment.

4. Outlook

The BOK’s monetary policy meeting on October 11th will be critical in determining the future direction of interest rates. With conflicting data on housing prices and household debt, the BOK faces a pivotal decision. The financial and real estate markets will closely watch to see whether the central bank moves ahead with a rate cut or holds firm on its current stance.

September’s mortgage and household loan trends are key indicators for the BOK’s upcoming interest rate decision. While a sharp decrease in demand has not been observed, there are signs of a gradual stabilization. The BOK's decision next month will be a crucial turning point for South Korea's economy, as it navigates the complex interplay between real estate trends and the broader economic outlook.