[Insight & Opinion] The Government Must Stop the "Buy a House with Debt" Policy

Originally, I intended to write an article on a different topic. However, after seeing the news that household debt is rapidly increasing again, I changed my mind. The issue of household debt is so crucial to our economy that other topics seem less important. Last December, in my article titled "Capitalism Grows Only When the Real Estate Problem Is Solved," I argued that instead of adopting the Japanese-style measures?which attempted forced housing stimulus after the real estate bubble crisis?we should respond with the American-style solution that, after the global financial crisis, reduced household debt from about 100% of GDP to around 80%. This approach would allow our economy, including the real estate sector, to recover. I earnestly hoped that we would avoid premature stimulus measures until housing prices were affordable relative to citizens' income levels, as following the Japanese model would likely lead Korea into a long-term recession. However, reality has unfolded differently from my hopes. The government's real estate policies announced since January can be summed up as "Buy houses with debt, but don't buy or sell houses with debt." Various loan regulations have been relaxed, and the special Bogeumjari Loan has created a new wave of 'Yeongkkeuljok' (those who borrow to the maximum).

The side effects are numerous. The housing price bubble has not burst. Some might argue that prices have fallen significantly from their peak. But if the public had borrowed 1,000 trillion won to buy stocks, you would recognize that the stock prices formed under such conditions contain a huge bubble. I would agree with the claim that if the current household debt ratio were around 80% of GDP, there would be little bubble in housing prices regardless of price. However, with household debt exceeding 100%, housing prices are indeed inflated.

The bigger side effect is that if this level of household loans continues, as recently emphasized by Lee Chang-yong, Governor of the Bank of Korea, the base interest rate will need to be raised further. While this might be effective in reducing household debt, it would be poison to the real economy, including consumption and investment. It would also be a huge negative factor for the stock market. It is regrettable that if the Yeongkkeuljok had not borrowed so much, they would have invested and consumed that interest amount, greatly benefiting each other's economy. The Ministry of Economy and Finance must recognize that the current recession among small and medium-sized merchants stems from this. Further household loans will lead to a more severe recession.

The best solution is to reduce household loans without raising the base interest rate. This means minimizing shocks to the real economy. The real economy should no longer be sacrificed for real estate. We need to strengthen real estate loan regulations again and raise real estate loan interest rates, while reducing the interest burden on vulnerable groups. According to the Bank of Korea, fortunately(?), more than three-quarters of household debt in Korea is concentrated among high-income earners or those with high credit ratings, so the impact of raising only real estate loan interest rates on borrowers may not be significant. On the contrary, if the interest burden leads to the sale of homes exceeding one per household, and the proceeds are used for consumption and investment, Korea's economy could experience a favorable breeze again. Fortunately, the government, the Bank of Korea, and the Financial Supervisory Service all view the household debt problem seriously in unison.

Now, high-income earners should stop complaining about household debt reduction policies. The government should stop paying attention to their complaints. It is time to stop buying or maintaining homes with excessive debt. Isn't the country becoming sick?

Seo Junsik, Professor of Economics, Soongsil University

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