[Why&Next] "Pureo vs Andwae" What Is DSR Causing Conflict Between Financial Authorities and Political Circles?

Conflict Over DSR Regulation Between Financial Authorities, National Assembly, and Construction Industry
Financial Services Commission: "Easing DSR Regulation May Lead to Increased Household Debt and Housing Prices"
Ruling Party and Real Estate Industry: "Local Real Estate Market Slump Is Severe, Regulation Should Be Relaxed"

The conflict between financial authorities and the political and construction sectors over the Debt Service Ratio (DSR) regulation is intensifying. The ruling party and the construction industry have demanded a relaxation of the DSR regulation to overcome the severe local real estate market slump, but the financial authorities, concerned about rising household debt and housing prices, have rejected the request.

Ruling Party: "DSR Should Be Relaxed to Revive Real Estate Market" vs Financial Services Commission: "Caution Needed to Avoid Sending Wrong Signals to the Market"

According to industry sources on the 20th, the political sector has been continuously requesting the Financial Services Commission to ease the stress DSR regulation since the beginning of this month. The People Power Party officially requested a temporary relaxation of the DSR regulation to the Financial Services Commission after the 'Livelihood Measures Review Party-Government Meeting' on the 4th. Kwon Seong-dong, floor leader of the People Power Party, stated, "The unsold housing situation and construction market slump in non-metropolitan and local areas are severe," adding, "It is time to actively respond to the local unsold housing crisis by putting all options, including drastic regulatory relaxation, on the table."

DSR (Debt Service Ratio) refers to the proportion of a borrower's total loan principal and interest repayments to their annual income. It is considered a stricter regulation because financial institutions review all loans, including housing loans, credit loans, and student loans, by summing up principal and interest. Banks can only lend if the borrower's DSR does not exceed 40%, but since the implementation of the current stress DSR, loans have been further restricted due to additional interest rates. The National Assembly and the construction industry argue that the real estate market has further frozen due to the tightening of the DSR regulation.

Ruling party lawmakers also demanded the relaxation of the DSR regulation from Kim Byung-hwan, chairman of the Financial Services Commission, and Lee Bok-hyun, governor of the Financial Supervisory Service, at the full meeting of the National Assembly's Political Affairs Committee on the 18th. Kim Sang-hoon, a People Power Party lawmaker, said, "DSR regulation relaxation is necessary to revive the local real estate market," adding, "Construction has a significant impact on the economy, so now is the golden time to present countermeasures." Kang Min-guk, also from the People Power Party, pointed out, "The unsold housing problem in non-metropolitan areas is a complex issue involving financial regulations and demand contraction, not just oversupply," and emphasized, "A temporary relaxation of the stress DSR regulation is needed."

The Financial Services Commission considered the People Power Party's request but ultimately concluded that it is not yet time to ease the regulation. The biggest concern for the Financial Services Commission regarding the relaxation of the DSR regulation is the further surge of household debt in South Korea, which is already among the highest levels worldwide. According to the Bank for International Settlements (BIS), South Korea's household debt to GDP ratio was 92% as of the first quarter of last year, ranking among the top globally. Although it has been decreasing annually from 99% in 2021, it still requires management. Due to high household debt, consumers' spending power decreases, and various economic side effects such as rising housing prices and asset polarization may occur. Therefore, financial authorities aim to reduce household debt to an appropriate long-term level in the low 80% range.

There are also research findings that the DSR regulation actually reduces household debt and curbs excessive housing price increases. Doowan Bang, senior research fellow at the Housing and Urban Guarantee Corporation's Housing and Urban Finance Research Institute, analyzed the causal relationship between housing finance policies and household debt in a 2023 paper titled 'Analysis of the Impact of Housing Finance Policy on the Housing Market and Household Debt.' He found that household loans increased when the DSR regulation was not applied. Bang explained, "Empirical analysis showed that household debt decreased during periods when the DSR standard was applied, whereas total household debt increased when the housing market improved or the DSR regulation was not applied." According to the Bank of Korea, the slowdown in household loan growth in the fourth quarter of last year was influenced by the implementation of the second stage of stress DSR in the third quarter and strengthened voluntary regulations by banks, which reduced mortgage loans.

Financial Services Commission Chairman Kim Byung-hwan is answering questions at the National Assembly's Standing Committee on Finance and Economy plenary session on the 18th. On the left is Lee Bok-hyun, Governor of the Financial Supervisory Service. Photo by Yonhap News.

"The Third Stage Stress DSR Scheduled for July Will Proceed as Planned"

Kim Byung-hwan, chairman of the Financial Services Commission, acknowledged the lawmakers' demands by saying, "All ministries share the recognition that the local construction market is struggling and that support measures are needed," but expressed the view that "it is necessary to try other more effective policies first." Kim added, "When listening to the field, there is doubt about whether the local unsold housing is due to the DSR regulation," and said, "We have established the DSR system through a difficult process, and if we exclude local areas again this time, it will undermine the credibility of the policy," showing a negative stance toward easing the regulation.

Lee Bok-hyun, governor of the Financial Supervisory Service, also stated, "With more than 70% of people's assets concentrated in real estate, there is a fundamental concern about whether stimulating demand to revive the real estate market is a sustainable approach," and announced plans to proceed smoothly with the third stage stress DSR scheduled for July.

With the financial authorities' position clarified, the 'Regional Construction Market Supplementary Measures' announced at the government's Livelihood Economy Inspection Meeting the previous day did not include any content related to easing the DSR regulation. The core measures included the Korea Land and Housing Corporation (LH) purchasing about 3,000 unsold apartments after local completion and launching corporate restructuring (CR) REITs to purchase and operate unsold local housing.

The construction industry expressed disappointment at the government's announcement. The Korea Housing Association evaluated, "While this measure will have an effect on reducing unsold housing, it is regrettable that it does not include key incentives such as tax and financial support that can stimulate overall housing demand."

However, the government left some room for partial regulatory relaxation by stating it will decide on the scope and ratio of the third stage stress DSR application in April or May, depending on the real estate market situation. A financial authority official said, "The third stage stress DSR is planned to proceed as scheduled in July," adding, "Further discussion is needed on the detailed contents."

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