Loose Commercial and Land Mortgage Loans... Government Considers Regulating Credit Loans

COVID-19 Impact Lowers Commercial Property Yields but DSR Higher Than Housing
Experts Say "Appropriate Level of Regulation Needed"

Government Considers Credit Loan Regulations to Control Housing Prices
Mentions Possibility of Additional Regulations

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] The fact that wealthy individuals are turning to land or commercial buildings despite bearing excessive debt can be seen as a balloon effect resulting from the government's regulations on mortgage loans. While gap investing to raise apartment prices can be curbed, indicating that real estate policies have been somewhat effective, loans secured by land or commercial buildings are managed more loosely compared to apartments, raising concerns.

"Commercial vacancy rates rose due to COVID-19... collateral value may decline"

Typically, the total debt service ratio (DSR) for non-residential secured loans is higher than that for mortgage loans. Banks only need to keep the average DSR of total household loans below 80%, and there are no separate regulations on the DSR for non-residential secured loans. Another reason for the loose management of DSR is that investors in commercial buildings or land often have many disposable assets beyond their income.

However, experts point out that regulations are also needed as commercial real estate income has not been the same since the COVID-19 pandemic. According to the Korea Real Estate Board, the vacancy rate for medium to large commercial buildings in the second quarter was 12.0%. Rent fell by 4.9% year-on-year to 26,640 KRW per square meter.

Professor Donghyun Ahn of Seoul National University’s Department of Economics explained, "There seems to have been a balloon effect due to tax policies and punitive taxation on multi-homeowners. In the past, under the same conditions, people would buy two or three apartments, but since that has become difficult, they have turned their attention to commercial buildings." Professor Sangbong Kim of Hansung University pointed out, "A debt service ratio of about 150% relative to annual income is considered risky."

Government also aims to tighten credit loans

Meanwhile, the government appears to be moving to tighten credit loans to curb housing prices. On the 7th, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated at a National Assembly audit of the Ministry of Economy and Finance, "Since mortgage loans have been restricted, household credit loans have increased, which is concerning," adding, "It is necessary to strengthen the DSR to comprehensively control loans."

This statement has been interpreted as a signal of further tightening of credit loans, increasing anxiety. Some banks have already proactively strengthened credit loan criteria. Previously, credit loans were possible up to a DSR of 100%, but now loans require head office review if the DSR exceeds 50%. The criteria for doctor loans, which allowed loans up to 200 million KRW considering future income for medical residents, have also been significantly tightened.

Opinions differ on whether strengthening credit loan regulations is appropriate. A Bank of Korea official said, "While growth rates have recorded negative figures due to COVID-19, the speed of household debt increase is rising, which is certainly a matter to consider," adding, "It is right to evaluate credit loans based on repayment burdens relative to income."

On the other hand, the financial sector believes this will only increase the balloon effect. A bank official criticized, "The government's probing of loan regulations is actually causing a surge in demand for credit loans."

Customers are already flocking to commercial banks to secure credit loans in advance. Some commercial banks have independently strengthened credit loan criteria, raising the possibility of a balloon effect appearing in regional banks and secondary financial institutions. According to data submitted by the Financial Supervisory Service to Min Hyung-bae, a member of the National Assembly’s Political Affairs Committee from the Democratic Party, some regional banks have more than 10% of household loans exceeding a DSR of 100%. In commercial banks, this is managed at around 2-3%.

This content was produced with the assistance of AI translation services.