The South Korean central bank warned on Thursday of the possibility of increased volatility in the financial market and its potential impact on the country's financial stability amid weak economic growth and high uncertainties at home and abroad.

The Bank of Korea (BOK) made this point in its latest financial stability report, where it also called for close monitoring of real estate market risks and household borrowing, given the recent rise in housing prices in Seoul and the surrounding region, reports Yonhap news agency.

"The South Korean financial system has generally stabilized, supported by the resilience of financial institutions and external payment capabilities. Amid high uncertainties and low economic growth, however, there is a chance that the volatility of financial market price variables could increase in the event of domestic or external shocks," the BOK said in the report.

The BOK forecasts South Korea's economy to expand by 1.5 percent in 2025, slowing from last year's 2 percent growth, mainly due to declining exports and weak domestic demand.

"Downward pressure on economic growth has increased due to domestic political conditions and changes in the economic policies of major countries, which could delay the improvement of the financial soundness of borrowers and financial institutions," it added.

The BOK pointed to recent instability in the real estate market and its potential impact on household debts as major risk factors.

Outstanding property-related debts stood at 2,681.6 trillion won (US$1.83 trillion) as of end-2024, up 4.8 percent from a year earlier, matching 105.2 percent of the country's nominal gross domestic product (GDP).

As of the end of February, banks' outstanding household loans rose 3.3 trillion won from the previous month, reaching 1,143.7 trillion won, according to BOK data.

"Lower interest rates could affect household debts. We are closely monitoring the market and will implement countermeasures, when necessary," Lee Jong-ryeol, a BOK deputy governor, said at a press briefing.

In February, housing prices in Seoul logged the steepest growth in three months after the Seoul city government lifted part of the land transaction permission system in some areas of Seoul's Gangnam, Seocho and Songpa.

In response to the surge in home prices, the government reinstated the regulatory system last week.

The central bank also pointed out that growing insolvency among vulnerable groups could affect the financial health.

The number of high-risk households, in terms of their debt repayment capabilities, stood at 386,000 as of the end of March 2024, or 3.2 percent of the country's total households.

The number of households that lack debt repayment capabilities, either in terms of income or assets, totalled 3.56 million, which represented 29.7 percent of all households with financial debts.

"We would see a larger number of such households, particularly in nonmetropolitan regions, given rising unsold properties and the sluggish construction sector," the BOK said.

The real estate market in provincial areas remains subdued in contrast to the situation in the greater Seoul region.