[Consecutive Defeats Debt Measures-③] Household Debt Diagnosis "March Next Year Is the Right Time for Loan Restructuring"

Experts: "Abnormal Debt Scale Threatens National Economy"
Priority Should Be Clearing Speculative Funds Over Loans to Financially Vulnerable Groups
Next Week's Announced Additional Household Debt Measures Show Diverging Views

[Asia Economy Reporter Song Seung-seop] The ongoing "hot potato" of household debt, which has persisted through successive administrations, has become an even greater concern under the Moon Jae-in administration. As the issue of household debt was postponed between administrations and generations, the scale of debt surged like a runaway train. Despite dozens of direct and indirect management measures implemented by past governments, household debt has ballooned like a snowball. During this administration, the COVID-19 pandemic, the surge in debt-financed investments (debt investment), and the "Young-kkeul" (pulling together every last resource) craze further fueled the increase in household debt. Household debt, stemming from the government's failed real estate policies, has only resulted in more harm to ordinary citizens rather than solutions.

Experts unanimously agree that household debt, which has become a ticking time bomb for the Korean economy's fragility, must be restructured in a timely manner. However, opinions diverged regarding the additional debt measures to be announced next week.

“Additional regulations are inevitable” vs “They will only block funds for ordinary people”

Regarding the timing for restructuring massive debt, experts pointed to March, when COVID-19 financial support ends. Professor Kim Dae-jong of the Department of Business Administration at Sejong University emphasized, "If the government intervenes artificially, there will be many negative repercussions," adding, "A gradual, predictable, and consistent interest rate policy is most important." He further explained, "It is necessary to observe the trend of U.S. base interest rate hikes and restore the rate to the pre-COVID-19 level of 1.25% by March in two phases."

There was also advice that the debt restructuring process should be closely coordinated with real estate policies. Former Professor Kim Tae-gi of the Department of Economics at Dankook University stated, "To drastically reduce household debt, it is necessary to first organize large-scale loans," and added, "People who hold multiple real estate properties with loans should be encouraged to put their properties on the market." This means that before restructuring loans for financially vulnerable groups such as small business owners or self-employed individuals, loans related to speculative demand should be addressed first.

Professor Kim Sang-bong of the Department of Economics at Hansung University analyzed, "It is appropriate to start when loan maturity extensions and interest payment deferrals end," noting, "Although the impact of COVID-19 on the economy has greatly diminished, March is suitable as the base effect will have completely disappeared by then."

Opinions were divided on additional measures under strong consideration by financial authorities, such as the early introduction of the borrower-level Debt Service Ratio (DSR) and the uniform regulation of DSR for the secondary financial sector.

Professor Sung Tae-yoon of the Department of Economics at Yonsei University said, "Basically, the problem lies in borrowing excessively beyond income or repayment capacity," and evaluated, "Since this is a measure to strengthen borrower soundness rather than a regulation on financial institutions, it is appropriate to implement it." Professor Kim Sang-bong also said, "If collateral value falls, the quality of debt deteriorates," and added, "Given the increase in household debt, it is an unavoidable choice."

On the other hand, Professor Kim Dae-jong criticized, "Savings banks are already managing loans autonomously to a considerable extent under current regulations," and said, "The secondary financial sector is the last channel for low-credit borrowers to get loans, and applying regulations uniformly here could push ordinary people into the private loan market." Professor Kim Tae-gi pointed out, "Ultimately, the problem is that people with low income find it difficult to buy homes," and remarked, "There are many aspects that need to be supplemented."

Abnormal speed of debt increase... Warning signs of risk

Opinions also differed regarding the financial authorities' regulation of jeonse (long-term lease) loans. On the 21st of this month, Financial Services Commission Chairman Ko Seung-beom stated at the National Assembly's Political Affairs Committee hearing that "the DSR regulation on jeonse loans will not be included in this measure."

Professor Sung Tae-yoon argued, "Since jeonse prices have risen, people take out loans, and cutting them off leaves only risky borrowing options," and claimed, "It was appropriate and remains a necessary measure." Professor Kim Dae-jong also pointed out, "It is not for speculative purposes, but funds needed by the homeless to move jeonse, and there is no risk," adding, "The goal of managing household debt is not to reduce the total amount itself but to resolve loans for speculative purposes."

Opposing views were also presented. Professor Kim Sang-bong said, "Jeonse loans should have been included in the total volume regulation," and diagnosed, "Given the severity of household debt, (jeonse loans) should only be allowed within one's income range or for the portion that has increased."

However, all experts agreed that household debt is at an abnormal level and could threaten the national economy in the future. Professor Kim Dae-jong criticized, "While the average annual inflation rate is 2%, house prices have risen by 20%," and pointed out, "There is a statistic that 30% of the total national expenditure goes to housing, which is not normal." Professor Kim Tae-gi also warned, "It is undoubtedly very serious and among the most dangerous worldwide," adding, "If debt increases and inflation overlap, there is concern about economic recession due to reduced consumption."

Professor Sung Tae-yoon forecasted, "Both the speed and scale of loan increases are problematic," and said, "It is not an immediate crisis for the financial system, but risks could increase as the interest rate environment changes."