[Opinion] DSR, Right Then but Wrong Now?

Chaesangwook Real Estate Analyst

DSR is a term that anyone who has taken out a loan in the past two years is probably familiar with, while others may be hearing it for the first time. DSR stands for Debt to Service Ratio, which indicates the percentage of total loan principal and interest repayments relative to one’s income. For example, a DSR threshold of 40% means that if someone earns 50 million KRW annually, the total principal and interest payments on all their loans should not exceed 20 million KRW.

Why was DSR introduced? In April 2021, financial authorities implemented this ratio to curb the rapidly increasing household debt and to ensure loans are granted based on repayment capacity. At that time, the annual loan growth rate exceeded 120 trillion KRW, with household debt growth surpassing 6%, raising serious concerns as household debt had exceeded 100% of GDP. The introduction of DSR aimed to slow down loan growth, targeting a long-term loan growth rate of around 4%.

Then why manage loans through DSR, which measures the income-to-principal-and-interest repayment ratio, instead of directly controlling the loan growth rate? This approach was adopted because borrowers have diverse loan conditions and the lending system is complex. As a result, the DSR set at that time has become a bottleneck for current loan growth.

On the 15th, the Bank of Korea released its Financial Stability Report. While the report covers various topics, it notably raised the issue of DSR. The Bank pointed out that about three-quarters of households with financial liabilities in Korea have a DSR below 40%, but one-quarter exceed the 40% threshold. It also noted that the average DSR for self-employed households has already reached 40%. This means that self-employed households are practically unable to borrow more, and one-quarter of general households also cannot take on additional loans.

Why have so many households exceeded the DSR threshold so quickly since its introduction in 2021? If loan growth had been managed directly, the loan growth rate in 2022 would have decreased by about -0.2%, well below the 4% target, indicating that the government’s goal was successfully met. However, because DSR calculates principal and interest repayments by multiplying the loan amount by the loan interest rate, the sharp rise in interest rates caused the DSR to rebound instead.

Data released by the Bank of Korea shows that the average DSR for all borrowers with household loans rose from 37.7% in 2020 to 38.4% in 2021, and despite repaying loans in 2022, it increased further to 40.6%. Households with spouse income may still have borrowing capacity, but overall, one-quarter of households exceed the 40% DSR. Since the average DSR for self-employed households surpasses 40%, the current loan market is effectively tight. Naturally, loan products exempt from DSR regulations, such as the ‘Special Home Loan’ (Teukrye Bogeumjari Loan), have become popular.

The government is currently announcing measures to resolve unsold housing inventory or to prevent a sharp decline in the real estate market. However, existing borrowers are all subject to the current DSR standards, making it difficult to obtain additional loans. Therefore, the Bank of Korea’s report could be interpreted as suggesting the need to reconsider raising the DSR threshold to revive the real estate market.

DSR was appropriate in 2021 but may be considered outdated in 2023. It remains to be seen whether government officials will prioritize household financial soundness or relax the standards amid challenges like unsold housing. It might be premature to say it was right then and wrong now, but the debate continues.