[Financial Stability Status] Regulatory Effects Weakened After COVID-19... Housing Prices Instead Soared

Bank of Korea Announces 'Financial Stability Situation (September 2021)'

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] Despite government loan regulations after the COVID-19 pandemic, household loan growth has further expanded, and the rise in housing prices has actually strengthened. This is evaluated as the effect of household loan regulations weakening because money was injected early in the COVID-19 outbreak to reduce the negative economic impact.

On the 24th, the Bank of Korea stated in its "Financial Stability Report" that "the total volume control effect of loan regulations showed contrasting patterns before and after the COVID-19 outbreak," adding, "From 2017 to 2019, before COVID-19, after regulations were strengthened, the increase in housing mortgage loans and other loans by financial institutions slowed or turned negative, but after COVID-19, the growth trend rather expanded."

Unlike before COVID-19, even though regulations were strengthened, the rise in housing prices further expanded. At the end of last year, the Loan-to-Value ratio (LTV) was 45%, and the Debt-to-Income ratio (DTI) was 46%, showing stricter regulations compared to pre-COVID-19 levels (55%, 48%), but the housing price growth rate jumped from 0.35% to 1.36% during the same period. In particular, the effect of loan regulation strengthening in regulated areas weakened significantly compared to the past. The government’s strong regulations in Seoul, Gangnam-gu, Seocho-gu, Songpa-gu, and other areas saw a sharp decline in regulatory effectiveness.

The Bank of Korea’s model-based estimation of the impact of DTI regulations on household loans and housing prices analyzed that recently, the magnitude and duration of these effects have weakened compared to the past.

A Bank of Korea official explained, "After COVID-19, macroprudential policies for financial support were implemented simultaneously, weakening the effect of household loan regulations," adding, "Although LTV and DTI regulations were strengthened to make loans more difficult, banks’ loan supply capacity expanded after the COVID-19 outbreak, reducing the effect." Contrary to the direction of LTV and DTI regulations, the prolonged COVID-19 situation inevitably sustained a monetary policy easing stance for a considerable period, increasing the money supply in the market and driving up housing prices.

The Bank of Korea also pointed out that, following the COVID-19 outbreak, abundant market liquidity increased economic agents’ risk appetite and profit-seeking tendencies, which contributed to the rise in loans and housing prices. The Bank stated, "Investors’ risk appetite has strengthened, and in the real estate market, concerns over housing supply shortages along with increased profit-seeking tendencies have intensified supply-demand imbalances and expanded expectations for housing price increases."

Another cause cited was the balloon effect expanding as some borrowers exploited regulatory arbitrage in response to the government’s strengthened loan regulations. As the government tightened bank loans, more loans were taken from non-bank institutions where borrowing was easier, and as housing mortgage loans became difficult to obtain, many resorted to unsecured loans, which is a representative example of the balloon effect due to regulatory arbitrage.

The Bank of Korea stated, "After COVID-19, unlike before, a financial boom and real economy slump appeared simultaneously, leading to a different policy mix than in the past," adding, "While strong loan regulations to suppress credit expansion were implemented, policy responses to support real economic recovery eased financial conditions, raising asset prices and deepening financial imbalances." Furthermore, it emphasized, "Policy responses are needed to reduce the degree of financial easing to mitigate excessive risk and profit-seeking tendencies."