Entry into super-aged society... “Need to change real estate-centered financial structure”
South Korea Reaching The Limits Of A Real Estate-Centric Financial Structure (Source: News1)
An analysis has emerged suggesting that as South Korea enters a super-aged society, a fundamental structural improvement is needed to overcome the limitations of a real estate-centric financial structure and a low birthrate and low growth structure. The Bank Of Korea's Economic Research Institute recently published a report pointing out that “Aging imposes structural constraints on real interest rates, prices, and the soundness of financial markets, thereby weakening the effectiveness of monetary policy.”
According to the report, as of the end of 2023, the proportion of the elderly population aged 65 and over has surpassed 20%, marking South Korea's entry into a true 'super-aged society.' Aging acts as a structural factor that induces a decrease in labor supply and an increase in savings among the elderly, thereby lowering real interest rates while also causing economic slowdown and expanding financial risks. It was also suggested that if the birthrate and life expectancy of 1991 had been maintained, the real interest rate in 2024 would have been 1.4 percentage points higher than it is now.
Additionally, population aging exerts downward pressure on prices. According to the research, it is predicted that from 2025 to 2070, the annual average inflation rate will fall by 0.15%P solely due to demographic changes.
From the perspective of financial market soundness, it also warned that excessive reliance on real estate increases vulnerability. Aging exacerbates the profitability and equity ratio of financial institutions, and banks with a high proportion of real estate loans are particularly exposed to greater risk.
The report emphasized the need for structural improvement through productivity enhancement and structural reform rather than short-term economic stimulus measures. In particular, the core tasks are ▲ Expanding economic activity participation of women and the elderly ▲ Alleviating housing and childcare burdens of the young ▲ Promoting technological innovation ▲ Strengthening the resilience of the foreign exchange market ▲ Reducing dependence on real estate finance.
In fact, a scenario was proposed that if the birthrate recovers to the OECD average level, the employment rate of the elderly increases, and productivity improves by 0.5%P annually, the real interest rate and growth rate could each rise by more than 1%P.
Additionally, to operate monetary policy in the changed environment, it was also proposed to ▲ Revise the open market operation system ▲ Refine communication strategies with the market ▲ Strengthen the organic linkage with macroprudential policies.
The arrival of the era of super-aging is becoming a watershed that determines the direction and sustainability of the South Korean financial system beyond a mere population issue.