KRIHS Report: Need for Interest Rate and Economic Cycle-Linked DSR
Jeonse Prices, Gap Investment, and Interest Rates Identified as Key Drivers of Housing Prices
Metropolitan Area More Sensitive; Five Times Greater Impact Than Non-Metropolitan Regions When Interest Rates Fall
An analysis has found that when housing prices fluctuate, the delinquency rate on unsecured loans rises two years later, and the number of unsold homes and foreclosures also increases. This indicates that the ripple effects of volatility in the housing market spread to the financial and pre-sale markets with a time lag, resulting in social costs. The Korea Research Institute for Human Settlements (KRIHS) suggested that as volatility in housing prices increases, so do social costs, and recommended the implementation of flexible lending regulations to buffer these effects.
In its report, "Social Costs of Expanding Housing Market Volatility and Future Policy Directions," published on the 20th, KRIHS identified key variables affecting housing prices as jeonse prices, gap investment, interest rates, and mortgage loans. According to the institute's empirical analysis, a 1% increase in jeonse prices leads to an average 0.655% rise in home sale prices. When gap investment (sales with existing jeonse tenants) increases by 1%, housing prices rise by an average of 0.148%. By region, the impact is greater in the Seoul metropolitan area (0.179%) than in non-metropolitan regions (0.128%). The metropolitan area was also found to be much more sensitive to changes in interest rates than non-metropolitan areas. In the case of interest rate cuts, the response of housing prices in the metropolitan area was five times greater than in non-metropolitan regions. Mortgage loans were also found to be a factor that increases market volatility only in the metropolitan area, with no significant effect in non-metropolitan regions.
KRIHS analyzed that the effects of housing market volatility do not appear in the short term but cause side effects across the real economy after a certain time lag. Approximately 24 months after housing price fluctuations, the delinquency rate on unsecured loans began to rise, and this effect was found to persist for up to 48 months. The number of foreclosures decreased during the initial 24 months but began to increase after 25 months, with a statistically significant rise observed after 40 months. Unsold homes also decreased for the first six months but began to increase after 12 months, with this upward trend continuing for about 40 months.
KRIHS recommended that sophisticated lending regulations are necessary to reduce housing market volatility, which causes social costs.
The institute emphasized the need for a system that automatically adjusts the stress Debt Service Ratio (DSR) according to interest rates and economic conditions. For example, if interest rates fall below a certain level (such as the neutral rate), raising concerns about an overheated housing market, or conversely, if interest rates rise and the risk of delinquency is expected to increase, regulations should be tightened. If these conditions are not present, regulations should be eased. KRIHS stated, "A system should be established that automatically adjusts based on quantitative criteria and economic indicators," adding, "This would enhance predictability and compliance with financial regulations."
In addition, KRIHS proposed measures to mitigate housing market volatility, including: operating policy mortgages focused on real demand, such as for non-homeowners and newlyweds; setting criteria for the timing, region, and target of policy fund supply; and introducing limited liability loans that restrict the borrower's liability to the disposal of collateral. These measures were presented in conjunction with improvements to loan structures and liquidity management. The institute also suggested that DSR should be applied to jeonse deposit loans. However, it stated, "For real demand groups such as low-income households and young people, exception criteria should be established, and risk management mechanisms through guarantee institutions should be implemented in parallel to ensure both policy effectiveness and financial soundness."
DSR is a system that limits an individual's loan limit based on the ratio of total annual loan principal and interest payments to annual income. On this day, the government announced implementation plans for the 'Phase 3 Stress DSR,' which will apply a 100% (minimum) additional interest rate from July. According to financial authorities' simulations, depending on the type of interest rate, the mortgage loan limit available from banks in the Seoul metropolitan area will decrease by approximately 10 to 30 million won (3-5%).
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
