Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Household debt puts Yoon in dilemma over loan deregulation
Multiple notices for housing sales are displayed in the window of a real estate agency in Seoul, Tuesday. Yonhap
By Yi Whan-woo
Experts urge president-elect to follow Moon's path on DSR policy based on personal income
By Yi Whan-woo
President-elect Yoon Suk-yeol appears to be facing a dilemma in his push to drastically ease lending rules for home buyers, as experts within and outside Korea are urging caution in some of his real estate policies.
The alarm bell comes amid soaring inflation and snowballing household debt, which may grow worse altogether if strict regulations on mortgage loans imposed by the Moon Jae-in administration are lifted and people can borrow money freely from banks.
Consumer inflation is feared to surpass 4 percent in the worst case, after months of growing by more than 3 percent, which is above the Bank of Korea's (BOK) target of 2 percent.
While the key rate should be raised to tackle inflation, total household debt stood at 104.2 percent of the GDP at the end of the first half of 2021, the highest among 37 major economies, according to an Institute of International Finance report.
The latest decline of housing prices in Seoul and hike in the benchmark interest rate are adding to economic risks, as many young homeowners in their 20s and 30s are at risk of bankruptcy after relying on bank loans to buy homes.
Against this backdrop, some experts contacted by The Korea Times, Wednesday, said that Yoon's rules on housing loans should be eased while making sure “only those who are capable of repayment can borrow.”
Specifically, the analysts urged the president-elect to embrace the Moon government's policy regarding the debt service ratio (DSR) that decides the available loan amount based on one's income.
The DSR has been a key for the current government's toughened lending rules, along with the so-called loan-to-value (LTV) ratio that determines the available loan amount based on one's collateral.
“I agree in general with all those opinions that the president-elect can refer to, concerning household debt and inflation,” said Kim Je-kyung, a chief consultant at real estate agency Tumi. “But to be precise, I have to say lending rules should be about who has a regular income to pay loans back responsibly, and thus, I ask Yoon to ease the LTV policy while following Moon's path when it comes to DSR.”
Kim referred to an International Monetary Fund (IMF) summary report released Tuesday, on the IMF Executive Board's annual consultation with Korea on its economy.
The International Monetary Fund (IMF) welcomed the Moon Jae-in administration's tightening of macroprudential policies in a summary report of the IMF Executive Board's annual consultation with Korea, released on Tuesday. AFP-Yonhap
The IMF viewed the rapid growth in household debt and housing prices “warrants close vigilance,” and accordingly, “welcomed the recent tightening of macroprudential policies” of Korea.
The report went on to say the board recommended Korea take measures to improve housing supply and “encouraged the authorities to stand ready to tighten macroprudential policies further as necessary.”
Such assessment was widely interpreted here that the IMF was favoring Moon's policies over Yoon's on LTV and DSR.
DSR measures how much a borrower has to pay for principal and interest in proportion to their yearly income, which serves as a ceiling on aggregate lending.
The Moon government set the ceiling at 40 percent for those whose loan amount exceeds 200 million won ($165,000).
Yoon plans apply the 40 percent ceiling only when the loan amount exceeds 500 million won.
Concerning LTV, the loan amount is capped at 40 percent of collateral value in most of the Seoul metropolitan area, where the housing demand remains high.
Yoon seeks to raise that rate up to 80 percent, to allow people without a sufficient amount of money to take out loans and buy homes.
Kwon Dae-jung, a real estate professor at Myongji University, also agreed with the idea of enhancing the rule on DSR while softening the one on LTV.
He said that idea is favored by the Korea Institute of Finance (KIF), a private think tank that recently recommended Yoon's presidential transition committee to maintain the current DSR regulation.
“Household debt becomes problematic because people borrow more than they can pay back,” he said. “And it is the DSR, not LTV, that can cause them to take out loans in a reckless manner if the barrier is too low.”