The Bank of Korea: "No Empirical Evidence That Strengthened LTV and DTI Regulations Since 2017 Have Worsened Inequality"

Regions with Stronger Loan Regulations See Greater Increase in Housing Assets

An analysis has found that the strengthening of macroprudential policies, which could restrict loan accessibility for households with fewer assets and potentially lead to debt and asset inequality, was not empirically observed in the case of South Korea’s tightened loan-to-value (LTV) and debt-to-income (DTI) ratio regulations since 2017.

On the 10th, the Bank of Korea (BOK) stated in its BOK Issue Note report titled "The Impact of Macroprudential Policies on Household Debt and Asset Inequality in South Korea" that "The strengthened LTV and DTI regulations implemented since 2017 in South Korea appear to have mitigated debt inequality among households, but seem to have had little significant effect on asset inequality."

This study used a difference-in-differences method to treat the 2017 tightening of LTV and DTI regulations in designated real estate adjustment areas as a regulatory shock and analyzed its impact on household debt and housing assets in South Korea.

The analysis showed that the stronger regulations applied to the adjustment areas effectively curbed household loans, with a statistically significant loan suppression effect observed among households in higher asset brackets. Conversely, the growth rate of housing assets was actually higher in the adjustment areas, and this increase was commonly observed across all asset brackets.

According to the report, the stricter regulations applied to the adjustment areas reduced the scale of household debt growth by 5.7%. When comparing changes in debt and housing assets by asset bracket, households with fewer assets did not show a statistically significant reduction in debt despite being subject to the stronger regulations. Meanwhile, from 2017 onward, the increase in housing assets in areas designated as speculative zones, speculative overheating zones, and adjustment areas was 9.3% greater than in other control regions. This indicates that despite the stronger regulations in adjustment areas, expectations of real estate price increases and other factors prevented the suppression of property price rises in these regions. The LTV and DTI regulations were effective in reducing debt but were not strong enough to halt the momentum of real estate price increases.

Kim Min-su, Deputy Head of the Financial Stability Research Team at the Bank of Korea, said, "The phenomenon where the strengthening of macroprudential policies restricts loan access for households with fewer assets, thereby exacerbating debt and asset inequality, was not empirically observed in South Korea’s case of tightened LTV and DTI regulations since 2017. This suggests that it is preferable to implement these regulations in line with their original purpose of enhancing macroprudential stability rather than worrying about the unintended possibility of worsening inequality."

However, Deputy Head Kim emphasized, "Uniform regulatory tightening could increase financing difficulties for lower-asset and lower-income households, especially those with limited access to formal credit, so more detailed and rigorous analysis and support measures need to be implemented concurrently." This is because, in this study, lower-asset households were more frequently excluded from the analysis due to missing data on debt and other variables compared to other brackets.

[Image source=Yonhap News]

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