Despite Real Demand Outcry... Moon Administration Announces Loan Regulations Ahead

Announcement of 'Additional Household Debt Measures' as Early as Next Week
Concerns Over Burden on Low-Income Real Demanders Due to High-Intensity DSR and Jeonse Regulations

[Image source=Yonhap News]

[Asia Economy Reporter Jin-ho Kim] As dissatisfaction grows among actual homebuyers who say they have given up on their "dream of owning a home" due to the government's successive household debt measures, the government has begun considering an "additional loan regulation card." The government's firm stance is to continuously and gradually implement strong measures until soaring housing prices are brought under control. However, given that a "loan famine" phenomenon is already occurring in the market due to strengthened total household debt management, it is becoming clear that the burden on low-income actual buyers who had planned to take out loans will increase further.

According to financial authorities and the financial sector on the 2nd, an "additional household debt measure" is expected to be announced as early as next week. Earlier, the government had announced plans to further tighten loan regulations as soon as the National Assembly audit targeting financial authorities was completed. This was revealed at the "Macroeconomic Financial Meeting" chaired by Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki on the 30th of last month. The four heads of the government's major economic and financial authorities who attended the meeting jointly declared an "all-out war" on household debt. They especially threatened to mobilize all available means.

Ultimate Loan Regulation 'Early Introduction of DSR' Indicated

The core of the "additional household debt measure" is expected to be the early implementation of the Debt Service Ratio (DSR) 40% regulation. It has been confirmed that the top two economic and financial authorities have already reached a consensus on this. In his opening remarks at the Macroeconomic Financial Meeting, Deputy Prime Minister Hong said, "We will seek ways to suppress the increase in household debt as much as possible while allowing loans within the scope of repayment ability." Financial Services Commission Chairman Ko Seung-beom also said, "(The additional household debt measure) will focus on enhancing the effectiveness of repayment ability assessments."

Originally, the Financial Services Commission planned to introduce the borrower-specific DSR 40% regulation in three phases. The DSR 40% regulation limits the repayment of loan principal and interest to within 40% of annual income.

The DSR regulation is currently preemptively applied to purchases of houses exceeding 600 million KRW in regulated areas, mortgage loans, and credit loans exceeding 100 million KRW. Subsequently, from July next year (phase 2) and July 2023 (phase 3), the target will be expanded to total loan amounts exceeding 200 million KRW and 100 million KRW, respectively.

However, the government has pushed for the early introduction of the DSR because household debt shows no signs of being controlled despite the phase 1 application of the DSR. In fact, mortgage loans and jeonse loans at the five major commercial banks increased by about 12 trillion KRW after July. Therefore, the government is taking an "ultra-strong" measure to curb household loans, even if it means enduring criticism for ignoring the difficulties of borrowers such as actual buyers who had planned loans immediately.

Possibility of Jeonse Loan Regulations Rising... Low-Income and Actual Buyers 'In Tears'

The additional measures are also expected to include regulations on jeonse loans. Financial authorities have repeatedly sent warnings to the market about this. Their judgment is that those with spare funds borrow the maximum amount possible through jeonse loans and invest the remaining money in stocks or cryptocurrencies. Chairman Ko also recently told reporters, "Since there are criticisms that jeonse loans are advantageous in terms of interest rates and conditions, we will comprehensively review those aspects."

Jeonse loan balances at the five major commercial banks surged 14.02% from 105.2127 trillion KRW at the end of last year to 119.967 trillion KRW as of the end of August. This is about 3.5 times the increase rate of mortgage loans (4.14%) during the same period.

The problem is the concern that the burden on low-income and actual buyers will increase further due to the early introduction of the DSR and jeonse loan regulations. The DSR regulation, which determines loan limits based on income verification, inevitably hits middle- and low-income earners and self-employed individuals hardest. In the case of jeonse loans, there are worries about damage to all actual buyers intending to reside in the property ahead of the autumn moving season. A financial sector official pointed out, "The more loan regulations are strengthened, the more the victims will be low-income and actual buyers," adding, "We need to be cautious about the side effects where only those with money benefit."

Meanwhile, the government's all-out war on household debt is expected to continue beyond next year. The government’s firm stance is to extend the timeline for total household debt management beyond next year and to continuously and gradually implement strong measures until the effects of the measures appear. The Financial Services Commission has set this year's household loan growth target at the 6% range. Next year, it plans to lower it to the pre-COVID-19 level of the 4% range and maintain this target beyond next year.