[Reporter’s Notebook] Monetary Authorities Issue SOS for Cooperation Amid Surge in Household Loans

"Unlike major countries, household debt in our country continues to increase without contraction, reaching a level that undermines macroeconomic and financial stability." (Bank of Korea)

"We should not follow policies that reduce taxes and interest rates just because transactions slow down, encouraging people to borrow money to buy houses." (Won Hee-ryong, Minister of Land, Infrastructure and Transport)

As the theory of a housing price bottom spreads and household loans surge, the Bank of Korea and the Ministry of Land, Infrastructure and Transport have belatedly started coordinating. Following the Bank of Korea's renewed warning about household debt risks in its Monetary and Credit Policy Report on the 14th, the Minister of Land, Infrastructure and Transport emphasized at a press briefing the day before that policies encouraging 'buying houses with debt' are unacceptable. The Bank of Korea's unusual call for policy coordination, pointing out the discord between monetary policy and macroprudential policy during past financial imbalances in 2014 and 2020, reflects the recent intensification of household debt risks.

The ratio of household debt to Gross Domestic Product (GDP) in our country is among the highest in the world. According to the IMF (International Monetary Fund), last year, Korea's household debt to GDP ratio was 105.1%, ranking third highest after Switzerland and Australia. The upward trend shows no signs of stopping. As of the 14th, the outstanding household loans at the five major commercial banks increased by more than 800 billion KRW in just half a month, with unsecured loans also rising by over 300 billion KRW during the same period. Household debt is increasing mainly through mortgage loans, with unsecured loans joining the surge. This is the background for the Bank of Korea's strong warning.

Although financial authorities recently decided to tighten housing loans, it is too early to be reassured. For those who believe in the 'real estate invincibility' theory, the capital gains secured through rising housing prices provide the motivation to bear interest costs. Expectations of price increases themselves must be curbed, but in the market, the housing price bottom theory is gaining strength instead. Fortunately, last week, financial authorities introduced measures to curb household loans, such as limiting the maximum maturity for calculating the Debt Service Ratio (DSR) to 40 years and applying additional interest rates, showing signs of 'policy coordination' gradually emerging.

The Bank of Korea stated, "The core factor of financial imbalances such as the increase in household debt is real estate," calling for consistency in related policies. It diagnosed that current housing prices are still overvalued and that related policies should be consistently established over a long-term horizon. As the real estate invincibility theory resurfaces, monetary authorities, financial authorities, and the Ministry of Land, Infrastructure and Transport are coordinating again. The government must clearly signal to the market that this coordination is not temporary but will continue going forward. Steady policy coordination is the minimum necessary condition for managing household debt and stabilizing the real estate market.

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