"The Government Urging People to Buy Houses on Debt Has Worsened Income Polarization"

Professor Yukyungwon: "Debt-Centered Housing Finance Policy Expands Class Disparities"
Increase in Mortgage Loans and Housing Among High-Income Groups... Difficulty for Homeless to Own Homes

[Asia Economy Reporter Kwangho Lee] There are claims that the government's housing finance policies, which encourage buying homes through borrowing, have caused housing price increases, thereby widening the gap between income groups. Additionally, it is pointed out that policy failures have led to soaring home prices to the extent that they are 'unaffordable,' making it difficult for the homeless to secure their own homes and increasing related expenditure side effects.

On the 6th, Professor Kyungwon Yoo of the Department of Economics and Finance at Sangmyung University wrote in an article titled "The Dilemma of Housing Finance Policy" for Hana Financial Research Institute, diagnosing that "housing finance policies promoting home ownership have led to increased housing costs and debt, expanding the gap between income groups and deteriorating quality of life."

Professor Yoo's assessment is that despite regulations related to housing finance such as Loan-to-Value ratio (LTV) and Debt-to-Income ratio (DTI), accessibility to funds within borrowing limits remains high, leading to increased mortgage loans and home ownership mainly among high-income groups.

He mentioned, "This trend is expanding to younger people in their 30s and 40s due to low interest rates maintained during COVID-19 and increased liquidity." In fact, last year, there was a craze among the 30s and 40s generation for buying homes by borrowing heavily, known as ‘Youngkkeul’ (borrowing to the limit). Amid the panic buying phenomenon among young people, housing demand surged sharply.

He expressed concern that "in the process of expanding home ownership by increasing debt, housing prices have surged, making it difficult for the homeless to secure homes and causing side effects such as increased related expenses."

Professor Yoo argues that homeowners with one house who bought by borrowing hardly gain real benefits from rising home prices. To realize capital gains, they need to either generate income through additional mortgage loans using their current home as collateral or dispose of their existing home, but since other home prices are also rising, actual residential service quality may decline. Especially, homeless people without homes are forced to live in rented or monthly lease housing due to skyrocketing home prices, and government policies have caused an expansion of housing cost disparities.

Professor Yoo pointed out, "Not only the real living gap but also the burden of housing costs and increased principal and interest repayments will widen income inequality and reduce opportunities for asset accumulation. Although higher asset prices may bring some improvement in asset distribution, there is concern that wealth gaps between classes will widen further in the long term." He also added, "In the future, due to rising interest rates, sharp declines in asset prices, and economic recessions, groups that have struggled to secure homes through debt or low-income vulnerable households will be exposed to greater risks."

In fact, concerns are being raised that household debt will become the biggest Achilles' heel of the Korean financial market in the second half of the year. According to the Bank of Korea, household debt in the first quarter of this year reached a record high of 1,765 trillion won. The pace of household debt increase relative to GDP last year was the second highest among OECD member countries. According to the Bank of Korea's financial stability report, more than half of the household debt in the first quarter, amounting to 931 trillion won, was used for purposes such as home purchases.

Professor Yoo advised, "As seen in the US subprime mortgage crisis, the strategy of ‘homeownership for all citizens’ is unsustainable, and there are limits to pursuing housing finance policies based on debt. It is urgent to shift from housing finance policies that cause debt and asset price surges to policies aimed at stabilizing real residential services."

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