[Reporter’s Notebook] 16 Trillion in the First Half... Household Loans Surge Due to Policy Mismatch

2.33%, 16.1629 trillion KRW.

This is the increase in household loans by the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) in just six months. Since the beginning of the year, financial authorities have stated that they will manage the annual household debt growth rate within the nominal growth rate, and the banking sector has pledged to keep the growth rate between 1.5% and 2.0%.

The reason authorities have been emphasizing household debt stabilization since last year is that household debt, which once exceeded 100% of the Gross Domestic Product (GDP), was ultimately judged to be holding back the Korean economy. However, in reality, the authorities' promises have become empty words in just half a year.

The main cause of the increase in household debt is undoubtedly mortgage loans. The increase in mortgage loans by the five major banks surged to 4.3 trillion KRW in April, then 5.3 trillion KRW in May, and 5.8 trillion KRW in June. The half-year increase in mortgage loans is about 22 trillion KRW, far exceeding the total household loan increase of 16 trillion KRW.

Contrary to the promises made at the beginning of the year, the background of the rapidly increasing household debt lies in the contradictory stance of the authorities. While one hand holds the goal of stabilizing household debt, the other hand implements policies that stimulate housing demand, creating a discordant situation.

For example, the outstanding balance of policy financial products such as Didimdol and Buteemok loans released from January to May this year reached 14 trillion KRW, exceeding 80% of the household loan increase in the first half of the year. This is due to the authorities raising the combined spousal limit for Didimdol and Buteemok loans, which led to a surge in demand for low-interest loans. Newly introduced special newborn loans with interest rates as low as 1% this year have had a similar effect. To make matters worse, the ruling party and government have also begun additional relaxation of income criteria for the newborn special loans.

The much-anticipated second phase of the Stress Debt Service Ratio (DSR) regulation was recently postponed. Originally scheduled to be implemented this month, the authorities suddenly delayed it by two months. The stress DSR is a regulatory measure that effectively reduces borrowers' loan limits. In effect, it granted an additional two months for borrowers to catch the 'last train' before the limit regulation.

Now, the authorities are feeling the burden of the rapidly increasing household loans and are taking steps to address the situation. Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), recently stated at an executive meeting, "Hasty expectations of interest rate cuts and reckless loan expansions riding on localized housing price rebounds could worsen the household debt problem that was stabilizing." The FSS has decided to conduct on-site inspections from the 15th of this month through next month to assess the actual state of household loans in the banking sector.

Commercial banks, wary of the FSS, have recently started raising mortgage loan interest rates. KB Kookmin Bank raised the fixed-rate mortgage loan interest rate, which is maintained for five years, by 0.13 percentage points from 3.0?4.4% on the 2nd to 3.13?4.53% on the 3rd. Hana Bank also increased its mixed-type mortgage loan interest rate by 0.157 percentage points from 3.183?3.583% on June 28 to 3.34?3.74% on the 1st of this month. Shinhan Bank, which led the banking sector's interest rate competition by lowering mortgage loan rates to the 2% range last month, is also considering raising rates soon. This is nothing short of ironic.

The cries of the "Yeongkkeul" (all-in borrowers) and victims of Jeonse fraud are still ongoing. Although the household debt-to-GDP ratio is below 100%, it remains high compared to major countries. While timely policy adjustments are important, fundamentally, it is impossible to achieve two contradictory goals simultaneously. It is time to reaffirm the goal of household debt stabilization.