Household Debt Measures Complicated by Ruling Party's Loan Regulation Easing

Concerns Over Surge in Loans Despite Tweezers Easing... Financial Authorities Deep in Thought
Complex Calculations Delay 'Household Debt Management Plan' Likely Until Next Month

[Asia Economy Reporter Kwangho Lee] The "Household Debt Management Plan" being prepared by financial authorities is drifting away from its original intent. After the Korean Land and Housing Corporation (LH) scandal last month, the announcement was delayed to include regulations on secondary financial institutions and non-residential collateral loans such as land. Then, following the ruling party's defeat in the April 7 by-elections, which led them to argue for easing real estate loan regulations, the plan became complicated. While targeted regulatory relaxations are being considered for actual demanders such as the homeless, newlyweds, and youth, there is concern that this could fuel the historically high household debt, deepening the financial authorities' dilemma.

According to the National Assembly and financial authorities on the 21st, the Financial Services Commission has completed its review to replace the current loan screening standard, the Debt-to-Income ratio (DTI), with the more stringent Debt Service Ratio (DSR), and to apply it on a borrower-by-borrower basis rather than by financial institution, aiming to curb loans. The overall approach has been to manage the rapidly increasing total household debt while relaxing loan regulations to ensure that actual demanders such as youth and the homeless are not blocked from purchasing homes.

The problem lies in the loan regulation relaxation measures for actual demanders. Since early last year, the Financial Services Commission has strictly limited loan regulations to manage household debt. Loans under KRW 900 million in speculative areas and speculative overheating zones are only allowed with a Loan-to-Value ratio (LTV) of 40% (50% in adjusted areas). For homes priced between KRW 900 million and KRW 1.5 billion, the LTV is 20%, and loans are prohibited for homes exceeding KRW 1.5 billion. As a result, there have been many criticisms that loans for low-income actual demanders are also blocked. Although actual demanders can receive an additional 10 percentage points in LTV, the home price must be KRW 600 million or less in speculative and speculative overheating zones (KRW 500 million or less in adjusted areas), and the combined annual income of the couple must be KRW 70 million or less (KRW 80 million or less for first-time buyers).

The ruling party argues for relaxing these conditions for actual demanders. Since housing prices in Seoul and other areas have risen significantly, they propose raising the home price threshold eligible for additional LTV benefits to KRW 900 million and increasing the income criteria. Kim Byung-wook, the ruling party's floor leader on the National Assembly's Political Affairs Committee, told reporters the day before, "Currently, a 10% LTV exception is recognized for actual demanders, and we are considering expanding that exception." He added, "The preferential rate is set at 10 percentage points, but it is more likely that the scope of application will be expanded," and said, "We need to consult with the Land, Infrastructure and Transport Committee and others."

The financial authorities are cautious because if the debt plan shifts to the level demanded by the ruling party, the basic purpose of the policy could be undermined. A Financial Services Commission official said, "The household debt management plan has already been prepared, but the government-party consultation has not been finalized," expressing a cautious stance.

Meanwhile, the household debt management plan is expected to be postponed until next month. Since it requires government-party consultation, it is widely expected that discussions will proceed after the ruling party's leadership election scheduled for the 2nd of next month.