"DSR Regulations to Curb Household Debt Severely Contract Domestic Economy"

Hankyung Research Institute, Report on 'Household Debt Status Analysis and Implications'

[Asia Economy Reporter Kim Heung-soon] It has been argued that hastily implementing the total debt service ratio (DSR) regulation to curb the total amount of household debt could cause a severe contraction in domestic demand, thereby reducing the possibility of economic recovery.

The Korea Economic Research Institute (KERI), under the Federation of Korean Industries, stated this on the 8th in its report titled "Analysis and Implications of the Current Household Debt Situation."

Serious Deterioration of Macroprudential Stability Due to Rapid Surge in Household Debt

According to the report, the current scale of household debt in our economy stands at 1,936 trillion won, with the household debt-to-GDP ratio exceeding 100%. The growth rate of household debt is 9.4% year-on-year, ranking first overwhelmingly among major countries.

The household debt-to-disposable income ratio, an indicator assessing the ability to manage debt with household income, also exceeded 170%, placing it among the highest within OECD member countries.

As of last year, the average debt per household was 82.56 million won, a 24% increase compared to 66.54 million won in 2016, with the most significant increase observed in the most vulnerable group (first quintile).

During the same period, assets in the fifth quintile increased by 21%, whereas those in the first quintile rose only by about 13%, indicating that while the financial soundness (debt-to-asset ratio) of the fifth quintile households improved, that of the first quintile deteriorated.

Repayment Risk of Vulnerable Groups Rising at the Fastest Pace

The report explains that indicators reflecting the capacity to respond to financial market shocks and actual debt repayment ability, such as the ratio of household debt to financial assets and the liquidity asset capacity index, have rapidly worsened over the past five years, especially among vulnerable groups (first quintile).

It particularly points out that, given the current phase of interest rate hikes, if the base rate increases as expected within this year, the risk of household debt delinquency due to increased principal and interest repayment burdens could become a reality.

Accordingly, the report emphasizes that rather than imposing excessive total volume regulations that could reduce the repayment capacity of vulnerable groups, urgent and meticulous measures to disperse the repayment risk of these groups are needed.

"DSR Total Volume Regulation Has Significant Side Effects of Economic Contraction"

The government has decided to implement the total volume regulation-type DSR starting this month to reduce household debt. According to the simulation results on the effects of DSR in the report, full implementation of DSR would reduce household debt by 2.5% and housing prices by 0.74%.

Additionally, due to reduced borrowing capacity secured by collateral and falling housing prices, consumption is projected to decrease by 0.26%, which in turn would shrink investment and total production by 0.53% and 0.37%, respectively.

Given the characteristics of our economy, where housing prices are high relative to economic scale and income levels, the report argues that DSR, which determines loan limits based on repayment ability, inevitably causes significant side effects from borrowing restrictions. These effects are likely to be more pronounced among middle- and low-income groups, who have higher consumption elasticity.

Lee Seung-seok, a senior researcher at KERI, emphasized, "At this critical juncture for economic recovery, rather than repeatedly applying total volume regulation policies, it is essential to swiftly promote rationalization of household debt, such as shifting toward long-term and fixed interest rates. Meanwhile, the government should provide guidelines and leave the actual assessment of repayment ability to market autonomy, establishing advanced credit practices. This approach offers a more fundamental solution to the household debt problem."

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