Bank of Korea: "Strong Government Will... Expectation for Household Debt Stabilization" [Q&A]

September Financial Stability Situation Press Briefing

On the 26th, Lee Jong-ryeol, Deputy Governor of the Bank of Korea (BOK), evaluated that the increase in household loans would gradually slow down, supported by the government's strong determination. Although it is difficult to definitively judge whether the trend has completely reversed based on the household debt trend in September, considering the government's strong will and the reduction of household debt in major countries such as Canada through macroprudential measures, there is an expectation that household debt will gradually stabilize.

At a press briefing on the financial stability report that day, Lee Jong-ryeol said, "Compared to past interest rate cuts, macroprudential management measures were not implemented at that time," adding, "This time, the government has a strong will to manage household debt in line with the growth of gross domestic product (GDP)." He also noted, "Recently, Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, stated that if the housing market overheats or grows rapidly, additional measures will be promptly and decisively implemented."

He continued, "Considering that major countries such as Canada have prepared macroprudential measures and are showing a reduction in household debt, there is an expectation that it will gradually stabilize."

Below is a Q&A session with Deputy Governor Lee Jong-ryeol and Director Jang Jeong-su of the Financial Stability Bureau.

- You mentioned that the increase in household loans will gradually slow down due to government measures, but did not specify when. Should the slowdown in household debt data for September be seen as a trend? The Korea Real Estate Board announced that real estate prices rose in August, while the Association of Certified Realtors reported a decline in apartment prices. Which indicator is closer to the Bank of Korea's analysis? What is the outlook for housing prices in October and November?

▲(Deputy Governor Lee) Since September, the rise in housing prices and the increase in household debt have shown signs of slowing. However, it is difficult to definitively judge whether this is a complete trend reversal. We need to observe September further. There are two reasons for optimism. First, the government's strong will. Compared to past interest rate cuts, macroprudential management measures were not implemented then. This time, the government is determined to manage household debt in line with GDP growth. Recently, Deputy Prime Minister Choi also stated that if the housing market overheats or grows rapidly, additional measures will be promptly and decisively implemented. Second, major countries such as Canada have prepared macroprudential measures and are showing a reduction in household debt. Considering these examples and the government's strong will, there is an expectation of gradual stabilization. However, it is too early to conclude that stabilization has been achieved. We need to observe further.

▲(Director Jang) In the June financial stability report, a decision was made to postpone the stress Debt Service Ratio (DSR) phase 2. Since then, the rise in housing prices and household debt has proceeded faster than expected. The increase in household loans in August was led by bank mortgage loans. With the implementation of phase 2 DSR and additional measures such as raising the mortgage loan premium rate in the metropolitan area, housing prices, which peaked in August, slowed in September. However, due to the Chuseok holiday effect, we need to monitor the trend. Currently, we are paying close attention to the trend.

▲(Director Jang) Although the private Association of Certified Realtors reported a decline in household debt in August, the financial stability report used the Korea Real Estate Board's indicators in its charts. The Association of Certified Realtors calculated prices based on actual transaction prices, but the statistical methodology has not been fully disclosed yet, so we need to observe further. While it has the advantage of being timely, its appropriateness and representativeness need to be assessed. Besides the Korea Real Estate Board, there are various statistics. We will consider all these indicators when assessing the real estate market situation.

▲(Team Leader Lim Kwang-gyu) Regarding the stress DSR, the government made fine adjustments over two months. When establishing measures for the self-employed, difficulties in funding were considered, as well as the increased delinquency rates among vulnerable groups. The restructuring process of real estate project financing (PF) was also taken into account during the two-month adjustment. However, household loans in the financial sector increased significantly in August. On August 3, there was a peculiar factor where credit loans increased sharply due to a stock market plunge. We believe that the surge in demand before the implementation of phase 2 stress DSR contributed to the increase. Since September, the increase has slowed, so we believe there is no major difficulty in managing household loans as a large trend. Regarding housing prices, the concern is not the prices themselves but financial instability risks from a financial stability perspective. When loan interest rates decrease, housing price pressures naturally arise. Since the government has strengthened macroprudential management measures, we expect some reduction.

- You said it is still too early to judge housing prices. Is this because the spread in the metropolitan area is progressing recently?

▲(Deputy Governor Lee) The time series is too short. There is also the Chuseok holiday effect. We need to judge whether the government's measures are effective, but the number of business days has been too short. There is also a holiday in early October, so we have no choice but to observe over time.

▲(Director Jang) Recently, real estate prices and transaction volumes peaked in August and the rate of increase has slowed. However, we need to monitor the trend. According to the consumer real estate price expectation index, the outlook for price increases remains dominant. There is also autumn moving demand, ongoing expectations for interest rate cuts in Korea following the U.S. Federal Reserve's monetary policy, and the possibility of real estate price trends spreading beyond the metropolitan area. Therefore, we need to watch the trend.

- You mentioned Canada as an example where household debt growth slowed despite interest rate cuts. How much did it decrease?

▲(Deputy Governor Lee) Household debt ratios in countries such as Canada and Switzerland are declining.

▲(Director Jang) Canada is a country with a very high household debt ratio, so we are paying close attention. Canada strengthened the loan-to-value (LTV) ratio and introduced loan-to-income (LTI) regulations this year. The household debt ratio rose significantly after COVID-19 but has fluctuated following deleveraging.

- The balance of loans exceeding 60% LTV has increased significantly, mainly in the banking sector. What factors caused this?

▲(Director Jang) In the past, regulations were based on LTV, but now they are based on DSR, so LTV regulations have been somewhat relaxed. In Seoul, the LTV limit is 70%, and in regulated areas, it is 50%, so there has been some easing. Also, loans to actual homebuyers have increased. LTV is linked to housing prices. When housing prices fall, the LTV ratio rises. Recently, mortgage loans, mainly from banks, have increased significantly.

- Why does a higher LTV ratio correlate with higher delinquency rates in mortgage loan soundness? The delinquency rate for vulnerable self-employed has exceeded 10% this year, rising sharply since last year. What factors are behind this? What restructuring measures are needed going forward?

▲(Director Jang) Basically, a higher LTV means borrowers have taken out the maximum loan possible against collateral. Depending on income and financial conditions, they are more vulnerable to shocks. Naturally, higher LTV increases risk. The high delinquency rate among self-employed is due to, first, the increased principal and interest repayment burden from continued monetary tightening, and second, the sluggish service sector caused by weak domestic demand. Restructuring is underway, but there are three main directions. First, financial support should be provided to those with competitiveness and business viability but who are delinquent due to repayment burdens. Second, support should be available for those with weak competitiveness to switch industries or exit. The government has announced expansion of the fresh start fund, broadening support targets and extending the period. Lastly, the increase in self-employed is partly due to retirees entering self-employment after retirement. Measures should also consider this aspect.

▲(Team Leader Lim) LTV regulation ratios vary from 30% to 80%, averaging about 60%. We are monitoring the proportion exceeding 60%. When LTV rises, additional collateral may be required or repayment demanded, and more people may want to sell collateral to repay loans. However, in the housing market, especially in provincial areas, sales are not proceeding well. Non-bank institutions tend to have higher LTV loans.

- This can also be seen as a request to properly implement macroprudential policies. How long should current macroprudential policies continue? Until what conditions should they be maintained? Given the significant increase in debt burden due to the government's LTV regulation easing, shouldn't a clear message be sent to the government?

▲(Deputy Governor Lee) We are not demanding the government to act; the government has already declared its intentions, so we are expressing expectations. The government has stated that if the housing market overheats, additional measures will be promptly implemented. The extent of implementation should refer to foreign cases. Financial authorities have already considered and are deliberating on this. We do not take the housing market lightly. It is at a very high level, so concerns are justified. Considering efforts to manage well through policy coordination, we expect easing. This does not mean there is no cause for concern.

▲(Director Jang) Many central banks in major countries have cut rates. Generally, rate cuts contribute to housing price increases. Korea has high household debt ratios and financial stability vulnerabilities. Monetary policy alone cannot solve this. Coordination with macroprudential policies is important. The government announced supply and demand measures in August. When rates are cut, efficient resource allocation is important. If resources concentrate on real estate, it is not desirable for medium- to long-term economic growth. Therefore, it is important to prevent rapid increases in household debt. Additional macroprudential measures are being reviewed, and timely measures will be prepared. The BOK will discuss with the government. Like monetary policy, consistency in macroprudential policy is important. The government currently emphasizes downward stabilization of household debt. Under the principle of consistent DSR regulation based on borrower income, additional measures are being considered.

- Has the postponement of phase 2 DSR led to any financial stability policy effects such as on self-employed delinquency rates? Expectations for a policy pivot by November are rising, but the September DSR assessment is difficult. Is there insufficient time to confirm policy effects?

▲(Deputy Governor Lee) Phase 2 stress DSR was implemented from September. The time to analyze its effects is too short. The government will observe further and, after confirming the effects of phase 2 regulation, will introduce additional measures if household debt expands. We do not see a mismatch in timing between the BOK and authorities. Since phase 2 was implemented recently, we need to observe and respond to its effects.

▲(Director Jang) When the stress DSR was postponed in July, the effect was considered comprehensively along with real estate soft landing measures and self-employed support measures under preparation. Like the BOK considers inflation, growth, and financial stability when setting rates, the government is seeking a policy mix including real estate market stabilization, household debt management, and self-employed support. Policy effects are not immediately visible. However, the first evaluation of real estate PF business viability has been conducted, and normal projects are undergoing light or public auctions. Although there are risks such as delinquency rates in non-bank sectors, the halt in further increases suggests some effect. Regarding timing of rate cuts, there are two weeks until the next Monetary Policy Committee meeting, so decisions will be made based on comprehensive information on real estate and household debt. We must observe trends and base judgments on forecasts. This applies to any policy decision. We continue to monitor real estate and household debt trends.