BOK Rejects Link Between Money Supply Growth and Rising Home Prices, Exchange Rate

The Bank of Korea has pushed back against views that recent increases in liquidity are driving up housing prices and the won-dollar exchange rate.

The central bank published a blog post titled "Understanding the Recent Liquidity Situation" on Wednesday to address the issue.

"Theoretically, it is true that increased liquidity acts as an upward factor on asset prices and exchange rates," said Park Sung-jin, head of the Market Overview Team at the BOK's Financial Markets Department. "However, various factors are working in combination behind the recent rise in metropolitan housing prices and the won-dollar exchange rate, so it is unreasonable to explain this solely by increased liquidity."

According to the BOK's analysis, the long-term trends of money supply and housing prices show they generally move in tandem rather than having a clear lead-lag relationship, with each influencing the other. While increased liquidity flowing into the housing market can create upward pressure on prices, rising housing prices can also expand liquidity as demand for home purchase loans increases.

The central bank noted that explaining the recent rise in metropolitan housing prices solely through liquidity effects is particularly difficult given that household lending has been slowing due to macroprudential policy measures. Park said, "Rather, concerns about supply shortages and demand concentration in specific areas due to preference for 'one quality property' are the main factors behind rising home prices." He added, "Recently, the proportion of cash purchases without loans has increased in core Seoul areas including the Gangnam three districts, which means that accumulated liquidity from the past, rather than newly supplied liquidity, is flowing into the metropolitan housing market in pursuit of returns."

The BOK views supply and demand factors such as expanded overseas securities investment by residents and exporters' increased tendency to hold foreign currency as having a greater impact on the recent exchange rate surge than liquidity. In theory, increased liquidity can indirectly affect exchange rates through the inflation channel. When a country's inflation rate rises higher than that of another country, the relative purchasing power of its currency declines, leading to long-term currency depreciation.

However, Park explained that considering the lack of significant difference in long-term inflation expectations between Korea and the United States recently, and that U.S. consumer price inflation (approximately 3%) is higher than Korea's (approximately 2%), the inflation and liquidity channels do not appear to be having a significant impact on the recent exchange rate rise.

The central bank's public rebuttal comes as opinions have emerged that the recent surge in M2 (broad money supply) has released large amounts of money into the market, triggering won weakness and rising metropolitan housing prices.

The BOK also noted that differences in M2 components make Korea's monetary growth appear larger. Korea includes exchange-traded funds (ETFs) and other beneficiary certificates in M2, while the United States excludes them. The central bank explained that the recent increase in Korea's M2 is due to money flowing into ETFs and other beneficiary certificates amid stock price gains. In contrast, U.S. M2 excludes time deposits over $100,000, beneficiary certificates, money trusts, and financial bonds, and only includes retail money market funds. Taking these factors into account, Korea's M2 growth is generally at a similar level to the United States, according to the BOK's analysis.