[Debt Dilemma] ④ Global Experts Also Say "Korea Must Strengthen Real Estate Loan Regulations"

Peterson Institute Director: "Concerns Over Korean Household Debt, Strengthen Regulations"
China's Monetary Policy Ineffective but Regulations Deflated Bubble
Reduce DSR Exceptions and Encourage Fixed and Short-Term Loans
Experts: "Above All, Consistent Government Policy Is Crucial"

As household debt, centered around real estate-related loans, shows a significant increase again, voices calling for stronger regulations on real estate loans are emerging. Although the government has been rolling out countermeasures one by one amid growing concerns over household debt, experts emphasize the need for consistent and steady government efforts, such as strengthening the Debt Service Ratio (DSR) regulations and supplying products that can enhance loan soundness. Adam Posen, director of the Peterson Institute for International Economics and a global economic scholar, also pointed out in a recent interview with Asia Economy that South Korea needs to tighten loan regulations to reduce household debt.

Adam Posen: "Concerns Over Korean Household Debt... Need to Strengthen Bank Loan Regulations"

In an interview with Asia Economy on the 3rd, Director Posen said about South Korea's household debt issue, "I am aware that Lee Chang-yong, Governor of the Bank of Korea, and the Bank of Korea have been warning about household debt," adding, "I think it is now at a level that warrants concern." South Korea's household debt-to-GDP ratio (101.7%) ranks among the highest globally, and since it can act as a factor hindering future consumption, investment, and growth, government-level management is necessary.

Based on past experience, Posen said that loan regulations are more necessary than benchmark interest rates to reduce household debt. He advised, "Looking back at the 1990s Asian financial crisis and the 2008 global financial crisis, regulations proved to be much more effective policies than adjusting benchmark interest rates," and added, "South Korea would be better off using methods that strengthen personal loan requirements and bank loan regulations rather than adjusting benchmark interest rates as a strategy to reduce household debt."

In fact, the 1997 Asian financial crisis was caused by reckless borrowing-driven external growth of domestic companies, and the 2008 global financial crisis was triggered by excessive high-interest mortgage loans to low-credit borrowers, which led to the collapse of Lehman Brothers. Major advanced countries such as the U.S. and Europe significantly strengthened regulations after the global financial crisis and succeeded in some deleveraging (debt reduction). Posen cited the relatively low debt levels of households and companies as one of the reasons why the U.S. economy is thriving despite the recent high-interest rate environment. This contrasts with South Korea, which has effectively failed in deleveraging and is experiencing a household debt crisis.

Posen pointed to the Chinese real estate market as a recent example where regulations were effective. He said, "The Chinese Communist Party has been responding with monetary policy to deflate the real estate bubble but saw little effect," adding, "However, recently, by strengthening regulations on real estate investment conditions themselves, the real estate bubble quickly deflated." Chinese President Xi Jinping is pushing structural reforms to reduce the local government and corporate debt accumulated over decades. Although this has led to economic stagnation and slowed growth, it is evaluated that the real estate bubble has been partially resolved.

Increase 'Fixed-Rate, Long-Term' Loans Instead of 'Variable-Rate, Short-Term' Loans

The idea that household debt issues should be resolved through government policies rather than benchmark interest rates aligns with Governor Lee Chang-yong's views. At the National Assembly audit on the 23rd of last month, Governor Lee said, "Adjusting through micro policies is less costly than through monetary policy," adding, "Still, if household debt does not decrease, the possibility of raising interest rates should be kept open."

As household debt shows signs of increasing again, the government announced last month its plan to swiftly introduce a stress DSR within the year. The stress DSR applies an additional margin rate when calculating the DSR, considering the possibility of future interest rate hikes. This reduces the loan limit individuals can receive, making household debt management easier. However, experts explain that more proactive measures, such as reducing DSR exceptions, are necessary to curb excessive expectations of rising housing prices.

Professor Lim Jae-man of Sejong University's Department of Real Estate said, "It is necessary to strengthen regulations like Loan-to-Value (LTV) and DSR to prevent excessive loans," adding, "Also, since loan soundness is an issue and many loan products in Korea are variable-rate and short-term, more fixed-rate, long-term loan products should be introduced going forward." Currently, the DSR system excludes many exceptions when calculating principal and interest, such as jeonse loans, interim payment loans, reconstruction relocation costs, and additional contribution loans. Moreover, factors that stimulate household debt, like apartment pre-sales, are prevalent, so overall regulatory adjustments are needed.

On the 3rd, Adam Posen, Director of the Peterson Institute for International Economics, was interviewed by Asia Economy. Director Posen stated that strengthening loan regulations is more effective than raising the benchmark interest rate to solve South Korea's household debt problem. Photo by Hyunmin Kim kimhyun81@

Government's 'Consistency' Most Important in Reducing Real Estate and Household Debt

However, there are concerns that overly strengthening DSR regulations could make it difficult for ordinary citizens to own homes in the short term and harm self-employed individuals with many loans, so a careful approach is necessary.

Doosung Kyu, director of the Mokmin Economic Research Institute, said, "Instead of setting a fixed line and applying DSR regulations uniformly, it is necessary to apply methods such as stress indices or linking with delinquency rate increases," adding, "If regulations are too strict, loans for self-employed people who cannot fully disclose their income may be completely blocked." He further stated, "While preserving the basic function of the DSR system, we need to check whether it is acting as a constraint for those who genuinely need loans."

Many analyses also emphasize that consistent government policy is more important than the content of regulations. Even if regulations are strengthened immediately, if the market widely expects that "regulations will be loosened again if the economy slows," it can lead to 'Yeongkkeul' (borrowing to the limit) or increased household debt. During the Moon Jae-in administration, regulations on loans, taxes, and real estate overall were significantly strengthened, mainly by the Ministry of Economy and Finance and the Ministry of Land, Infrastructure and Transport, but housing prices rose further due to expectations that "regulations will be loosened when the administration changes."

Ko Jong-wan, president of the Korea Asset Management Corporation, said, "In Korea, loan regulations tend to be loosened or tightened depending on economic conditions, but consistency in regulations is necessary," adding, "Since self-employed and vulnerable groups risk being pushed from institutional finance to non-institutional finance if regulations are tightened, specialized loan systems should be created, and public funds for young people to own homes should be separately prepared and managed at the government level." Professor Lim Jae-man emphasized consistency, saying, "It seems the government’s will to reduce household debt is not strong, as it strengthens loan regulations but then creates special newborn loans."

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