[Consecutive Defeats Debt Measures-①] Both Conservatives and Progressives Stumble on Real Estate... Only Ordinary People Suffer from Inconsistent Policies

Lee Myung-bak, Park Geun-hye, Moon Jae-in Announced 19 Measures Over 10 Years
Experts Say "Financial Policy Alone Has Limits... Housing Supply Must Also Be Addressed"

[Asia Economy Reporters Kiho Sung, Seungseop Song]Lee Jeong-ho (78 years old, pseudonym), who has been running a Chinese restaurant in Seoul for 20 years, is a non-homeowner. In 2008, during the global financial crisis, housing prices in the Gangnam 3 districts also fell, and loans were easier to obtain, but Lee had no capacity due to debts incurred to raise initial business capital. In 2011, when business was booming, he tried to buy a house but gave up on the dream of homeownership as loans became difficult due to the ‘Comprehensive Household Debt Measures.’ His son, Lee Gyumin (43 years old, pseudonym), who is in the process of inheriting the family business, regrets not buying a house by ‘Yeongkkeul’ (borrowing to the limit). Believing only the government’s claim that house prices would fall, he has been moving from one jeonse (long-term deposit lease) house to another, but is struggling to raise the soaring jeonse deposit due to the current government’s strong loan regulations. Now, with real estate prices having risen too much, he has completely given up on owning a home.

Experts widely agree that the main reason for the failure of nearly 20 government debt policies over the past decade is the use of financial policy as a tool for real estate measures. In particular, policies that swung between extremes depending on the real estate market under each administration further fueled market confusion. Each administration vacillated between announcing debt policies to stimulate the real estate market and then immediately imposing suppression measures when overheating occurred. Household debt measures focused on real estate, rather than on employment and economic impacts from external factors such as the global financial crisis and COVID-19, ultimately pushed house prices and household debt to record highs, producing only innocent victims among ordinary citizens.

◆ Debt policies zigzagging with the real estate market = Over the past 10 years, household debt policies have swung between extremes depending on real estate prices. A representative example is the Lee Myung-bak administration. In January 2008, during a press conference as president-elect, Lee gave an ambiguous answer to questions about the new government’s real estate policy, saying, "We will use policies to stabilize housing prices and curb real estate speculation while also activating transactions." Because of this, the Lee Myung-bak administration pursued financial policies that were dragged along by real estate prices throughout its term.

Especially after the 2008 US-originated global financial crisis caused apartment prices nationwide, including in the Gangnam 3 districts, to fall, financial policies began to fluctuate. A representative example is the implementation of the Debt-to-Income ratio (DTI) in September 2009, initially only in the Gangnam 3 districts, then expanded to the entire Seoul metropolitan area. One year later, in August 2009, DTI was temporarily abolished for houses priced under 900 million KRW outside the Gangnam 3 districts. However, this policy stance did not last long, and in April 2011, the government reinstated DTI regulations in the metropolitan area as part of comprehensive household debt measures. The core was to encourage fixed-rate and non-grace period installment loans and to verify borrowers’ repayment ability.

The Lee Myung-bak administration, under a ‘business-friendly’ policy and the global financial crisis, emphasized activation over stabilization of real estate. As household debt became an issue after the global financial crisis, the inconsistent approach worsened the quality of debt.

◆ ‘Buy a house with debt’ vs ‘Yeongkkeul ends in disaster’ = The Park Geun-hye administration initially promoted financial easing policies to induce rising real estate prices. Having witnessed the decline in apartment prices in the Gangnam 3 districts during the previous administration, it actively used real estate as a tool for economic stimulus. The popular slogan at the time was "Buy a house with debt." Under former Deputy Prime Minister Choi Kyung-hwan’s ‘Choinomics’ ideology, financial regulations were significantly eased. In July 2014, the second year of the administration, the Loan-to-Value ratio (LTV) and DTI were unified and eased nationwide to 70% and 60%, respectively. This, combined with interest rate cuts, fueled the expansion of household debt.

As real estate prices surged and household debt soared, starting in February 2016, the government began to adjust by introducing credit screening guidelines beginning in the metropolitan area, and in January 2017, introduced the Debt Service Ratio (DSR) to curb household loans. However, considering the political situation at the time, the regulatory measures after the second half of 2016 are widely seen as stopgap, reactive measures rather than reflecting strong policy will, especially with the impending presidential impeachment. Alarmed by soaring house prices and household debt, the Moon Jae-in administration imposed harsh loan restrictions, but only increased resistance. The first measure in August 2017 strengthened LTV and DTI to 40% in speculative overheating and speculative areas. The number of mortgage loans was also limited from one per borrower to one per household.

In December 2019, even stronger regulations were introduced, applying a 20% LTV on apartment prices exceeding 900 million KRW and banning mortgage loans altogether for apartments priced over 1.5 billion KRW. However, criticisms remain that real estate policies continue to fail. According to the Korea Real Estate Board, the average comprehensive housing sale price in Seoul rose 80.7%, from 475.81 million KRW in May 2017 to 859.96 million KRW in August this year.

Experts predict that the current administration’s household debt policies are also likely to fail if they do not achieve real estate price stabilization. Professor Kim Sang-bong of Hansung University’s Department of Economics criticized, "The household debt problem is serious, and it should be resolved by increasing housing supply, not just through financial policies. Side effects such as a ‘loan cliff’ or pushing borrowers to private loans occur because the policy only suppresses total loan volume."