Phase 3 DSR Implementation... Household Debt Unlikely to Hinder Bank of Korea's Monetary Easing

With the implementation of the phase 3 stress-based Debt Service Ratio (DSR) regulation scheduled for July, securities analysts have assessed that the potential for household debt to hinder the Bank of Korea's monetary policy easing in the future is limited.

On June 4, the Wealth Management Strategy Department at Korea Investment & Securities stated this in its report titled "Introduction of Phase 3 Stress DSR Regulation and the Bank of Korea's Monetary Policy." The DSR refers to the ratio of an individual's total annual debt repayments to their annual income. Since February last year, financial authorities have been gradually implementing the stress DSR regulation, which applies an additional interest rate (stress rate) in the DSR calculation. The phase 3 DSR is scheduled to take effect from July 1.

The report explained the phase 3 DSR as follows: "A stress rate of 1.50% will be applied across all sectors, while for regional mortgage loans, the phase 2 stress rate of 0.75% will be applied until the end of December this year." It further stated, "The proportion of stress rate application to mixed and periodic mortgage loans will be increased compared to the current (phase 2) level, in order to encourage the expansion of pure fixed-rate loan issuance."

The report also mentioned that financial authorities plan to apply differentiated stress rates between the Seoul metropolitan area and regional areas when introducing the phase 3 stress DSR regulation. It stated, "The impact of regional mortgage loans on the recent increase in household debt has diminished. In regional areas, the number of unsold homes after completion and housing transaction volumes have decreased, indicating a continued downturn in the real estate market."

Additionally, the report cited several reasons for the continued increase in household and mortgage loan balances in April, despite the financial authorities' ongoing efforts to strengthen household loan management. These include the temporary lifting of the land transaction permit system in February and the disappearance of seasonal factors that had reduced lending in March. The report added, "Along with the impact of the temporary lifting of the land transaction permit system, preemptive loan executions ahead of the phase 3 stress DSR implementation may lead to an expansion in household loan growth through the second quarter."

However, it is expected that the implementation of the phase 3 stress DSR regulation from July will stabilize the growth of household loans. The report stated, "Although policy loans are not included in the phase 3 stress DSR regulation, ongoing coordination between the Financial Services Commission and the Ministry of Land, Infrastructure and Transport is expected to keep the growth of policy loans at the current level." It added, "From July, the growth of household loans is expected to stabilize." Furthermore, the Bank of Korea will closely monitor household debt trends and determine the timing and pace of additional base rate cuts accordingly," the report said, concluding that "the likelihood of household debt acting as a significant obstacle to the Bank of Korea's monetary policy easing in the future is limited."