[Why&Next] 'Goal or Outcome'... Financial Authorities and Ministry of Land Draw Parallel Lines Over Policy Finance

Consensus Reached on the Need for Household Debt Management
Last Year’s Fund Loans Totaled About 52 Trillion Won, But This Was Not a 'Target'
MOLIT: "It Is Merely the Result of Market Demand"

While financial authorities and the Ministry of Land, Infrastructure and Transport (MOLIT) share a consensus on the necessity of managing household debt regarding the operation plan for policy finance, they exhibit subtle differences in perspective. The financial authorities advocate for management through setting supply targets for policy finance, whereas MOLIT places more emphasis on qualitative management considering the market structure. In particular, MOLIT takes a cautious stance on setting separate supply targets, stating that "policy finance is naturally determined based on criteria such as income requirements and loan limits."

On the 7th, Kwon Dae-young, Secretary General of the Financial Services Commission, responded to a question about the supply target for policy loans during a preliminary briefing on this year’s work plan by saying, "Since it is a necessary system for ensuring the housing stability of the people, we are continuously discussing it with MOLIT, and a significant portion of opinion coordination has been achieved," adding, "Once consultations with MOLIT, the Ministry of Economy and Finance, and the Bank of Korea are completed, it will be announced at some point." On the 14th, Lee Bok-hyun, Governor of the Financial Supervisory Service, pointed out at an executive meeting that domestic banks’ self-funded policy loans (Didimdol and Buteemok loans) surged by 180.8%, from 24.7 trillion won at the end of 2022 to 69 trillion won at the end of June 2024, highlighting the concentration of policy finance in banks and lending support to the Financial Services Commission.

However, MOLIT, which manages the Housing and Urban Fund that finances policy loans, agrees with the broad direction of reducing household debt but shows a different tone toward this approach. A MOLIT official told Asia Economy in a phone interview, "Setting separate supply targets for policy finance itself is meaningless," drawing a clear line, and emphasized, "About 52 to 53 trillion won was disbursed last year, and a similar level is expected this year, but this is a 'result,' not a 'target.'" The explanation is that policy finance is naturally determined based on criteria such as income requirements and loan limits, and there has never been an attempt to set and achieve a specific target.

What MOLIT focuses on is the structural aspect of the housing finance market. According to MOLIT, the current housing finance market is largely composed of three funding channels: commercial banks, the Housing and Urban Fund, and the Bogeumjari Loan. However, last year, the interest rate on the Bogeumjari Loan rose above the market mortgage loan rates, rendering it practically ineffective. MOLIT explains that if loans supplied through the fund are reduced, demanders will inevitably flock to commercial bank loans.

MOLIT also emphasizes that the demand for funds in the housing purchase and jeonse (long-term lease) markets is somewhat fixed. Given that jeonse deposits in Seoul can reach hundreds of millions of won, it is virtually impossible to transact using only pure equity capital. Ultimately, even if policy finance is reduced, the corresponding demand for funds is likely to shift to commercial banks.

The official pointed out, "It is too simplistic to think that reducing policy finance will directly lead to a decrease in household debt." The total loan volume depends on overall real estate transaction volumes and jeonse contract volumes. However, MOLIT’s position is to focus on qualitative management aimed at reducing unnecessary loans. Examples include the mandatory application of the debt-to-income ratio regulation in the metropolitan area last year and the principle of restricting new loans secured by unregistered apartments under post-registered collateral conditions.

As a result, suggestions have emerged that coordination between policy authorities has become more important than ever. A financial sector official emphasized, "Both the authorities and MOLIT share the policy goal of managing household debt, but there is indeed a difference in perspectives regarding the means," adding, "It is a time when a comprehensive approach considering the market structure is necessary."