[The Pitfall of DSR]② The "Borrow According to Ability" Effect Is Clear... Side Effects Must Be Filtered Out

Contributing to Reducing Household Debt and Controlling Housing Prices
The 'Last Bastion' Even the Government Avoids
Still, There Are Cases Where Exceptions Should Apply

On the 9th, officials were busy moving through the corridor of the Financial Services Commission at the Government Seoul Office in Jongno-gu, Seoul, where financial authorities decided to include mortgage loans (Judaemae) in the 'debt refinancing' infrastructure set to launch in May by the end of the year. Financial authorities explained that the purpose is to reduce the interest burden on mortgage loans by building a debt refinancing platform that allows users to compare financial sector loan interest rates at a glance and switch loans easily. Photo by Dongju Yoon doso7@

The financial authorities strengthened the DSR (Debt Service Ratio) system, which prevents excessive borrowing beyond income, to reduce household debt and curb housing prices. Simply put, DSR is a system that sets a borrowing limit based on all the debt one has. It includes the principal and interest of all loans such as mortgage loans, credit loans, overdraft limits, car installments, and card loans.

Loans can only be taken up to a certain ratio of annual income: 40% for primary financial institutions and 50% for secondary financial institutions. Since July last year, it has been applied without exception to all borrowers with total loan amounts exceeding 100 million KRW. The key feature is that the amount an individual borrower can borrow from financial companies has itself decreased.

The fact that the government regards DSR as the 'last line of defense' against household debt is evident from the real estate measures announced this January. After lifting the regulation areas except for Yongsan-gu in Seoul and the three Gangnam districts, the loan-to-value ratio (LTV) for mortgage loans was increased to 70%, but the DSR was not touched at all. Despite criticism such as "If the borrower's annual salary remains the same, loosening the LTV limit is useless because the loan limit remains the same" and "The effect of lifting regulation areas will also be negligible," the government did not budge.

Kim Ju-hyun, Chairman of the Financial Services Commission, drew a line by saying, "It was said that debt was too high and problematic, so it is strange to now ease the DSR" (March 31). Lee Bok-hyun, Governor of the Financial Supervisory Service, also stated at the first anniversary press conference on the 1st, "The DSR regulation will not take a stance that significantly shakes the principle."

[Image source=Yonhap News]

Since the introduction of DSR loan regulations and the rise in interest rates, household debt has steadily decreased and housing prices have fallen. According to the Bank of Korea's report on bank household loans, the balance at the end of April was 1,052.3 trillion KRW, about 8 trillion KRW less than a year ago (1,060.2 trillion KRW). Housing prices also followed a downward trend. The 'KB Leading Apartment 50 Index' by KB Kookmin Bank turned downward in July last year (101.18) and continued to fall until last month (88.88).

Seok Byung-hoon, Associate Professor of Economics at Ewha Womans University, stated in a paper titled "The Effect of Interest Rate Increase under Household Loan Regulations" that "If the interest rate rises by 0.5 percentage points annually, the real housing price falls by 0.08% compared to the normal state level, and household loans decrease by 1.4%," adding, "Introducing DSR regulations or reducing the LTV ratio cap on household loans strengthens the effect of interest rate hikes in stabilizing housing prices."

Although the positive effects of DSR have been proven, there are also calls for exceptions to be applied in certain situations. Kim Mi-ru, Research Fellow at the Korea Development Institute (KDI), said, "DSR is absolutely necessary from a soundness perspective," but advised, "However, since the one-stop refinancing service lowers the borrower's DSR, it is desirable to allow borrowers with a DSR exceeding 40% to use it without being subject to DSR regulations."