South Korea’s central bank chief warns over Gangnam-style housing boom

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South Korea’s central bank governor has called for a cap on university admissions from Seoul’s most upmarket neighbourhoods as a “drastic solution” to the capital’s runaway housing market.

Cut-throat competition among parents for private exam tutors and university admissions coaches clustered in the exclusive Gangnam district is driving up house prices and borrowing, he said, exacerbating inequality and accelerating the depopulation of provincial areas.

“The Korean education system is often praised by world leaders, but they don’t know the reality,” Rhee Chang-yong, governor of the Bank of Korea, told the Financial Times.

He added that high school graduates from Gangnam — the upscale Seoul district made famous by pop star Psy’s 2012 satirical hit “Gangnam Style” — were strongly over-represented in the country’s top universities, reducing opportunities for applicants from other regions.

“Rich people in Seoul send their kids from the age of six years to cram schools to start preparing for university, while female workers decide to stay at home just for their kids’ education. This fierce competition is harming the economy and making everyone unhappy.”

The BoK held off on cutting interest rates last month for fear of fuelling further borrowing. “Drastic solutions” were required, Rhee said, including encouraging people to leave the capital.

South Korea was the first big Asian economy to raise interest rates in response to surging inflation in 2021. The BoK has kept its benchmark rate at 3.5 per cent since early 2023, holding off on cutting rates despite hitting its 2 per cent inflation target last month.

Rhee said that while public debt-to-GDP remained relatively low by developed world standards at 45 per cent, South Korea’s household debt including mortgages — which at 92 per cent of GDP is among the highest in the developed world and hit an all-time high in the second quarter — was weighing on economic growth.

“We have to show that the momentum on household debt is changing, and that the trend can and should be reversed,” said Rhee.

Many experts attribute South Korea’s collapsing fertility rate — the lowest in the world — to pressures associated with brutal competition for limited academic and professional opportunities at a small number of prestigious high schools, universities and companies in and around the capital.

This year, more than 2.9mn people applied within a 48-hour period to bid for a single apartment in the satellite town of Hwaseong just outside Seoul. Real estate markets in other parts of South Korea are characterised by vacant properties and depopulation.

“More than anything else, our demographic situation keeps me up at night,” said Rhee, adding that the country needed to attract more foreign workers.

Rhee said the BoK expected the South Korean economy to grow 2.4 per cent in 2024 and 2.1 per cent in 2025, against an estimated potential growth rate of 2 per cent.

But he expressed concern that the country’s growth model, which is based on manufacturing and relies on its leading industrial groups, was running out of steam.

“We are so accustomed to the way we were successful in the past,” said Rhee. “Now I feel our horse is tired and we need to switch to a new horse, but people say: ‘Oh, this horse has been running so fast and so well, why do we need to change it?’”

The central bank governor, who also serves as chair of the Bank for International Settlements’ committee on the global financial system, said policymakers had yet to reach a consensus on whether the unwinding of the “yen carry trade” that destabilised markets last month was complete.

But speaking from the BIS’s base in Basel, he said the August sell-off had “clearly demonstrated that we need to strengthen our data collection on derivatives and swaps”.

“The other lesson is just how quickly money can move,” he said. “In Korea, for example, it was institutional investors leading sell-offs but retail investors who drove the rebound with money they borrowed using their smartphones. That has clear implications for financial stability.”