① Over the past decade, financial institutions’ credit supply has been increasingly concentrated in the real estate sector. By the end of 2024, the total funds provided by households and businesses to the real estate sector reached KRW 1,932.5 trillion, accounting for half of the nation’s total credit to private non-financial sector. 

② The real estate sector in South Korea exhibits a disproportionately high concentration of loans compared to its contribution to the nation’s total value added. This excessive allocation of financial resources to real estate restricts the availability of credit for more productive sectors, ultimately diminishing the capital’s value-added effect and negatively impacting economic growth. In fact, our research on the relationship between Korea’s private credit and economic growth shows that the quantitative expansion of private credit in the real estate sector actually limits the positive impact of private credit on overall economic growth. 

③ The continued expansion of credit to the real estate sector has strengthened the connection between the credit market and real estate market. As a result, the financial system has become more vulnerable to both domestic and external shocks. A sudden decline in real estate prices could trigger debt deleveraging, potentially increasing risks to the financial system and causing the real economy to contract. Additionally, financial institutions’ continued reliance on real estate-backed lending practices discourages the innovation of financial services, weakening the competitiveness of the domestic financial sector. 

④ The sustained concentration of credit in South Korea’s real estate sector stems from three interconnected factors: persistent demand from households and corporations, profit-driven strategies of financial institutions, and regulatory incentives favoring real estate-backed lending. In particular, financial institutions have focused on real estate-collateralized loans because these loans offer relatively stable profits with lower risks, especially given their heavy reliance on interest income. Policy supported housing loans—combining direct lending support and indirect guarantees—have expanded rapidly, contributing to the increase in real estate credit. Above all, under the BIS capital regulation system, real estate-collateralized loans are assigned significantly lower risk weights than corporate loans. This further incentivizes banks to increase their lending secured by real estate.

⑤ Given these considerations, it is necessary to establish comprehensive measures, based on policy time horizons, to ease the disproportionate concentration of financial institutions’ credit in the real estate sector and ensure a smooth supply of funds to more productive sectors. First, in the short term, the growth of real estate credit should be kept at an appropriate level by enhancing existing policy tools such as the Debt Service Ratio(DSR) and adjusting the supply of policy loans. For the long term, measures should be implemented to reduce the incentives for financial institutions to issue real estate-secured loans by improving capital regulations, such as differentiated adjustment of risk weights, and enhance the incentives for extending corporate loans to productive sectors. Moreover, the credit supply system, including housing finance, should be reformed to ensure that financial intermediation functions more effectively.