Don’t blame the DTIThe call to ease the debt-to-income ratio, which is used as criteria for a lender to determine a consumer’s qualifications for a loan, is gaining ground as the slump in the housing market worsens. Those who advocate for relaxed regulations are blaming the DTI ratio for dampening housing demand and transactions. In April, the government, worried about the sluggishness in the real estate market, increased the number of exceptional cases for which the DTI regulation could be waived. It is now considering revising the regulation altogether.
But the government should think hard before taking any action on the DTI cap. It would be wrong to ease the restriction in order to stimulate the real estate market. A prolonged slump in the property market could damage the economy, straining consumer demand and slowing economic recovery. But restricting consumer loans based on their affordability is effective in reining in reckless lending and borrowing practices. The DTI ratio regulation, which caps bank loans at 50 percent of a borrower’s gross annual income, prevents lenders from offering new loans beyond what a borrower can afford.
Both lenders and borrowers have been ignoring common sense. Many borrowers sought ambitious mortgage loans to buy houses they could not afford. That worked when housing prices soared. But they forgot that housing prices could also fall, which rendered them unable to pay off their debts. The banks, meanwhile, were largely at fault for extending loans without examining whether or not a borrower could repay them. The financial authorities had to step in with the DTI ratio to fix reckless lending practices.
But the criteria for enforcing responsibility in the loan program should not serve to stimulate or control the real estate market. Moreover, household debt is hovering at dangerous levels. In Korea, the ratio of household debt to disposable income tops the levels for American and Japanese households. If interest rates increase, a good deal of household debt will likely become insolvent. Easing the loan restrictions at this stage could do far more harm than good.
Also, it remains uncertain whether easing the DTI regulation will actually help boost demand. Many people have dropped the idea of buying houses because they believe housing prices in Korea are disproportionately high. With many people expecting housing prices to fall further, few are likely to venture into the market just because of eased lending restrictions. The government could help the most by keeping its hands off the real estate market. If it steps in every time prices fluctuate, it will only draw speculation. The authorities should focus on sustaining the economy at the macro level, regardless of the sluggish real estate market.