Apartment Pressed for Commercial and Land Mortgage Loans... Government Considers Credit Loan Regulations (Comprehensive)

New Non-Residential Mortgage Loans at 35%, DSR Exceeding 100%
Regulations on Commercial and Land Mortgages Weaker than Apartments, Raising Gap Investment Concerns

Prolonged COVID-19 Increases Commercial Vacancy Rates
Risk of Declining Collateral Value Due to Poor Performance of Income-Generating Real Estate

Government Considering Credit Loan Regulations to Curb Excessive Housing Investment
"Probing Loan Regulations Leads to Increased Credit Loan Demand," Criticism Arises

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] As the government tightens regulations on mortgage loans for high-priced homes, wealthy individuals are flocking to commercial properties and land. With it becoming difficult to invest in housing by borrowing excessively, those interested in real estate investment have turned to non-residential investments where loan regulations are more lenient. Unlike mortgage loans, it is easier to borrow even if the Debt Service Ratio (DSR) is high when purchasing commercial properties or land.

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, about 3.2 trillion KRW worth of new non-residential mortgage loans with a DSR exceeding 100% were issued over 10 months from September last year to July this year. This accounts for 35.2% of the total new non-residential mortgage loans of approximately 9 trillion KRW (8.99 trillion KRW) during the same period. The average DSR was 119.2%, exceeding 100%. Specifically, for commercial property loans, loans with a DSR over 100% amounted to 1.2 trillion KRW, with nearly half (45%) of the loans executed despite the principal and interest repayment amount exceeding the borrower's income.

DSR is an indicator showing the borrower's repayment burden relative to their repayment ability, calculated by dividing the annual principal and interest repayment amount of all loans held by the borrower by their annual income. Simply put, individuals who bought land or commercial properties in the past 10 months were able to obtain loans even when their principal and interest repayment ratio exceeded 100% of their income.

Currently, the Financial Supervisory Service manages banks by setting average DSR targets (40% for commercial banks, 80% for regional and specialized banks). When borrowing against homes priced over 900 million KRW in speculative or overheated speculation areas, a DSR regulation of 40% applies, but there are no separate regulations for non-residential mortgage loans.

Therefore, the fact that wealthy individuals are turning to land or commercial properties despite bearing excessive debt can be seen as a balloon effect caused by the government's mortgage loan regulations. While the policy has somewhat succeeded in curbing apartment price increases through gap investments, loans secured by land or commercial properties are managed more loosely than apartments, which calls for caution.

Especially as the COVID-19 pandemic has prolonged, the income from commercial real estate such as shops and offices is not as good as before. Professor Sangbong Kim of Hansung University’s Department of Economics said, "Due to COVID-19, lodging and food service industries have been hit hard, causing high vacancy rates in commercial properties. If recovery does not occur, it could shock the financial market." Representative Min argued, "Non-residential mortgage loans could also become a hotbed for gap investments in commercial properties, so regulatory measures are necessary."

"Vacancy rates in commercial properties have risen due to COVID-19... potential decline in collateral value"

Generally, the DSR for non-residential mortgage loans is higher than that for residential 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 mortgage loans. The fact that investors in commercial properties or land often have many disposable assets beyond their income is another reason why DSR is managed more leniently.

However, experts point out that regulations are needed as commercial real estate income has deteriorated due to the COVID-19 pandemic. According to the Korea Real Estate Agency, the vacancy rate for medium to large commercial properties 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, people would buy two or three apartments under the same conditions, but since that has become difficult, they turned to commercial properties." Professor Kim noted, "A principal and interest repayment ratio of about 150% relative to annual income is considered risky."

Hong Nam-ki, Deputy Prime Minister for Economy and Minister of Strategy and Finance Photo by Yonhap News

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, said at a National Assembly audit of the Ministry of Economy and Finance, "I am worried that household credit loans are increasing as mortgage loans are restricted," and added, "It is necessary to strengthen DSR to comprehensively control loans."

This statement has raised concerns as it is interpreted as a prelude to tightening credit loans. 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 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 are negative due to COVID-19, the rapid increase in household debt is certainly a matter to consider," and added, "It is right to evaluate credit loans based on repayment burden relative to income."

On the other hand, the financial sector believes it will only increase the balloon effect. A bank official criticized, "Government loan regulation tests are causing credit loan demand to surge instead."

Customers are already rushing to secure credit loans in advance at commercial banks. Some commercial banks have independently tightened credit loan criteria, raising the possibility of a balloon effect 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, some regional banks have more than 10% of household loans with a DSR exceeding 100%. In commercial banks, this is managed at about 2-3%.

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