"Progressive Surcharge When Exceeding a Certain Threshold"
"Protecting Genuine Demanders and Minimizing Market Distortions"
On the June 27 Measures: "Uniform Quantity-Based Regulation Has Side Effects"
Criticism has been raised that there are limits to stabilizing household debt solely through macro-level aggregate regulations and micro-level regulations centered on the Debt Service Ratio (DSR). Accordingly, there are calls to consider introducing a "macroprudential surcharge" system, in which the surcharge increases progressively when the loan amount exceeds a certain threshold. The current household debt management method, which is linked to the annual nominal growth rate forecast, has also been pointed out as needing improvement.
Kang Hyunju, Senior Research Fellow at the Korea Capital Market Institute, made these remarks in a recently published "Capital Market Focus" report under the theme "Structural Improvement Measures for Household Debt Management Systems." As of the end of 2024, the size of Korea's household debt relative to GDP ranks fifth among major countries worldwide. According to the Financial Services Commission's household debt management plan for 2025, released earlier this year, the household debt growth rate for this year is to be managed within the nominal growth rate forecast of 3.8%.
Kang stated, "The current household debt management method is operated in connection with the annual nominal growth rate forecast, but its limitations are gradually being revealed due to recent changes in the economic environment and increased uncertainty in forecasts." She pointed out, "Setting management targets based on the forecast at the beginning of the year may not be appropriate for the entire year. In an environment of high uncertainty, as is the case recently, the gap between the initial forecast and actual performance can become even wider."
The nominal growth rate forecast is inevitably affected by the uncertainties of its components: the real growth rate and the GDP deflator. As a result, the household debt management stance frequently changes, which weakens policy consistency and reduces market predictability.
Kang warned, "A more fundamental problem is that, during economic downturns, the policy excessively restricts credit supply, and during booms, it allows for increased leverage. Such pro-cyclical policy operations can actually amplify economic volatility. In the long run, this can undermine financial stability and lead to greater adjustment pressures in subsequent economic cycles."
Accordingly, Kang argued that it is necessary to introduce a management system based on the trend nominal growth rate over a medium-term horizon. She explained, "Household debt management from a medium-term perspective shares many similarities with the central bank's monetary policy operations. Likewise, household debt management should pursue a balanced approach that aims for medium- to long-term financial stability and overall economic equilibrium."
Specifically, she suggested, "It is possible to set a three-year average annual household debt growth rate target at a level slightly below the trend nominal growth rate, for example, at 80-90% of the trend growth rate." The trend nominal growth rate is calculated by removing temporary shocks and seasonal factors through statistical methods and reflects the economy's underlying growth capacity.
In addition, Kang argued that there are limits to stabilizing household debt with only the current macro-level aggregate regulations and micro-level DSR regulations that assess individual borrowers' repayment capacity, and that additional policy tools are needed.
She pointed out, "Due to deepening income polarization, DSR regulations can cause polarization in loan accessibility and act as a structural factor that intensifies real estate price differentiation between certain areas in the Seoul metropolitan area and other regions nationwide." Analysis of microdata from the Household Finance and Welfare Survey showed that, as of 2024, the top 10% of income earners accounted for 28.7% of all real estate mortgage loans.
Regarding the June 27 measures, which limit the maximum amount of mortgage loans in the Seoul metropolitan area and regulated areas, she evaluated, "While these are meaningful as emergency measures to curb large loans, the quantity-based regulation that uniformly limits loan amounts can have side effects, such as undermining financial accessibility for genuine demanders."
Kang argued, "To more systematically internalize the externalities of excessive borrowing, it is necessary to consider introducing a progressive macroprudential surcharge system, in which the surcharge increases progressively when the loan amount exceeds a certain threshold, regardless of whether the property is for sale or lease. This is a price-based regulatory approach proportional to the loan amount, which can serve as an alternative to minimize market distortions while protecting accessibility for genuine demanders."
She added, "By selectively imposing the surcharge only on large borrowers, who are decisive contributors to the increase in total loan volume, while not affecting the majority of small borrowers, it is possible to set a more sophisticated regulatory target. This can enhance social fairness and, at the same time, increase the effectiveness of aggregate management."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
