[Consecutive Defeats Debt Measures-①] Soaring Household Debt Due to One-Sided Regulations and Hot-and-Cold Policies

Real Estate Soars Amid Frenzy Like Yeongkkeul
Bank Loan Suspensions and Limit Cuts Yet Increase
Regulation Focused Only on Restrictions... Lacks Consistency in Details

Reference image of bank loan counter / Photo by Yonhap News

[Asia Economy Reporters Kwangho Lee, Hyojin Kim] "We will build a society where people can live without going into debt." When the Moon Jae-in administration launched in 2017, it presented this policy direction along with the core national agenda of managing the total volume of household debt. It was a blueprint aimed at stabilizing the financial market based on strong real estate regulations.

However, as a backlash to the 26 rounds of regulatory measures, real estate prices instead continued an unprecedented high-rise trend, and this stimulated a frenzy among young people of ‘Yeongkkeul (pulling together even their soul)’ and ‘Bitt-u (borrowing to invest),’ causing household loans to balloon like a snowball.

The Moon administration especially promised not to let the damage fall on actual demanders such as low-income households. However, many low-income people found it difficult to live without debt, yet they reached a situation where they could not borrow as they wished, according to evaluations.

As public dissatisfaction grew, the government recently shifted direction to somewhat ease regulations only on jeonse (long-term lease) loans. This is the background of the ‘farce’ where banks, which had locked down loans to align with government policy, resumed lending within just a few days.

According to the Bank of Korea on the 18th, household loans increased by more than 6 trillion won last month as demand for housing transactions such as jeonse funds continued to rise. Despite the implementation of the individual Debt Service Ratio (DSR) regulation in July and the financial authorities’ strengthening of household debt management, which led commercial banks to reduce limits and raise interest rates, the upward trend in loans did not subside.

There is also a precarious view regarding the increase in ‘future financial burden’ due to the rising debt of young people. According to the Bank of Korea’s ‘Financial Stability Report’ from September 2021, as of the end of the second quarter, the household debt balance of people in their 20s and 30s was 487.59 trillion won, accounting for 27% of total household debt. The Bank of Korea’s analysis attributes this to increased housing purchase demand among young people and a rapid rise in loans linked to the asset market, such as borrowing credit loans to invest in stocks.

Behind this phenomenon lies criticism that the government’s unstable approach, which pushed policies solely based on regulations but gave up consistency in detailed aspects when faced with resistance, is at play.

Last year, the government proposed a two-year actual residence obligation for reconstruction association members in speculative overheated districts in the June 17 measures but scrapped it in July after criticism that it was locking up jeonse supply. Also, the comprehensive real estate tax standard for one household one house was initially pushed with the bizarre logic of targeting the top 2% in official prices but was adjusted to 1.1 billion won. The capital gains tax exemption standard was announced to be eased from 900 million won to 1.2 billion won, but the bill’s processing has been delayed, only fueling market confusion.

Recently, the government has shown wavering over additional household debt measures to be announced right after the National Assembly audit. The Financial Services Commission, which emphasized managing the household loan growth rate at the 6% level this year, announced last week that group loans such as balance loans and jeonse loans would be excluded from total volume regulation after a wave of protests from actual demanders.

"Tightening loans is necessary, but unconditional total volume regulation is not"

Experts generally agree that tightening loans is desirable considering the household debt growth reaching risky levels. However, they point out that the increase in household debt stems from policy failures such as the three lease laws (Jeonse Reporting System, Jeonse Price Cap System, Contract Renewal Request Right), market regulations without housing supply, and indiscriminate tax bombs due to strengthened comprehensive real estate and capital gains taxes. Sudden and uniform total volume regulation, ignoring fundamental remedies, can cause other side effects.

An industry insider said, "The government is trying to stabilize real estate prices in reverse by suppressing the explosion of household debt, which is the result, without properly solving the root cause of skyrocketing real estate prices caused by policy failure," expressing concern that easing jeonse loan regulations could push up not only jeonse prices but also sale prices again. The explanation is that if jeonse prices rise, the threshold for gap investment?buying a house with jeonse?lowers, becoming a factor in house price increases.

Professor Tae-yoon Sung of Yonsei University’s Department of Economics advised, "You should not try to block loans unconditionally with total volume regulation. Instead, an environment should be created to gradually reduce loans by adjusting interest rates."