Populist 'Kong-eon' Without Party-Government-Blue House Agreement... Only Fuels Financial Turmoil

Public Sentiment Turns Against Ruling Party in By-Elections
Push for Significant Loan Regulation Easing
Policy Inconsistency with Blue House Emphasized

[Asia Economy Reporter Kiho Sung] Following the April 7 by-elections, the political sphere has introduced drastic loan regulation relaxation policies, raising concerns within the financial sector. In particular, the ruling party, having confirmed the public's discontent due to the failure to stabilize real estate and the loan regulations, is exerting strong influence. This is interpreted as a move to adjust the direction to appease the angry real estate sentiment among actual buyers and the younger generation. There is also a sensed discord with the Blue House, which insists on maintaining consistency in existing housing policies.

In the market, concerns are emerging that with household loan balances exceeding 1,000 trillion won, relaxing loan regulations significantly during a period of rising interest rates will inevitably deteriorate the quality of household debt. This could pose a burden not only to the financial sector but also to the entire domestic economy. The financial authorities’ policy stance to rein in household debt has inevitably become confused.

Financial Authorities in Charge of Loan Regulations Struggle Amid Discord Among Ruling Party, Government, and Blue House

◆Flood of Populist Financial Policies from the Ruling Party= According to political and financial sources on the 14th, the ruling party, sensing a shift in public sentiment on real estate from the election, is pushing for significant relaxation of loan regulations for youth and the homeless. During a joint speech session held the day before, candidates for the Democratic Party floor leader unanimously agreed that the next leadership should review real estate easing policies.

Assemblyman Song Young-gil argued, "For first-time homebuyers without a house, the loan-to-value ratio (LTV) and debt-to-income ratio (DTI) should be expanded to 90% so they can buy a house immediately." This means allowing home purchases with only 10% of the house price. The ruling party’s stance on easing loan regulations was rapidly formed just before the election. Former leader Lee Nak-yeon announced the ‘National Responsibility System for Homeownership,’ which aims to significantly relax financial regulations for first-time homebuyers and greatly expand tailored support such as preferential housing subscription. Hong Ik-pyo, chairman of the party’s Policy Committee, also stated, "LTV and DTI will be raised for low-income actual buyers." Chief spokesperson Choi In-ho of the Democratic Party said, "There is a possibility that financial regulations such as DTI will be somewhat relaxed to create conditions for the homeless and youth to purchase homes." The dominant view is that this is aimed at winning real estate votes just before the election.

The problem is that the ruling party, government, and Blue House appear to have reached no agreement on relaxing loan regulations. Prime Minister Chung Sye-kyun drew a line by saying he had "never been briefed" on the Democratic Party’s real estate loan regulation easing, and Lee Ho-seung, director of the Blue House Policy Office, emphasized, "We believe it is a very important time to maintain consistency in housing policy."

The discord among the ruling party, government, and Blue House has put the financial authorities in a difficult position. Not only is the lack of unified opinion problematic, but there is also a risk of sending the wrong signal of ‘loosening the money supply,’ which could further destabilize the market. The Financial Services Commission, which planned to announce household debt management measures last month, had to postpone the announcement due to the land speculation scandal involving employees of the Korea Land and Housing Corporation (LH), increasing its dilemma.

Populist financial policies beyond loan regulations are also pouring out. Last month, the ‘Partial Amendment to the Act on Support for Financial Life of the Underprivileged (Amendment to the Underprivileged Financial Support Act),’ which requires all financial sectors to bear the costs necessary for operating financial products for the underprivileged, was passed. This is regarded as the ‘first case of profit-sharing’ in conjunction with the ‘Profit-Sharing System’ proposed by the Democratic Party in January.

Independent Assemblyman Lee Yong-ho introduced a bill to lower the preferential commission rates for card company merchants, and Democratic Party Assemblyman Min Hyun-bae proposed a law allowing self-employed people to request debt forgiveness from financial companies during disasters, with banks required to take appropriate measures.

Populist Financial Policies Without Party Lines... Experts Warn "Inconsistent Policies Cause Financial Market Confusion"

◆Financial Sector Caught Between Ruling Party, Government, and Blue House... Experts Say "Don’t Amplify Confusion"= There is no party line in populist financial policies. Seoul Mayor Oh Se-hoon pledged ‘4-No (無) Loans’ as an election promise. The 4-No loans mean no guarantee fees, no interest, no collateral, and no documents. The core is to provide loans up to 100 million won for self-employed people who suffered during COVID-19.

Banks that would actually provide the loans say the promise is not entirely impossible but worry that if loan defaults increase, the impact could spread to banks as well. A bank official said, "We need a concrete implementation plan to evaluate accurately, but since the Seoul Credit Guarantee Foundation provides guarantees and Seoul City pays the interest, it is not an impossible structure," but also pointed out, "Since there is no collateral and it is difficult to properly assess repayment ability, if loan defaults spread, Seoul City alone will have limitations, which could affect the banking sector."

Experts warn that indiscriminate loan relaxation combined with the real estate market could cause significant confusion. Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "The current disruption in the real estate and housing market stems from policy aspects, especially related to rent regulations, and trying to solve this suddenly by expanding loans is risky." He added, "It could also fuel confusion in terms of policy consistency."

There are also forecasts that rapid policy shifts could accelerate house price increases. Professor Kim Sang-bong of Hansung University’s Department of Economics emphasized, "We need to carefully consider whether the direction of the political and government movements is correct," and added, "Now is the time to focus on supply rather than loosening money, ensuring timely supply to those who need and can afford housing is more important."