What about household debt?

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What about household debt?

The government has rolled out new measures it claims will curb the rise in household debt without regulating debt-to-income and loan-to-value rules.

Banks will prioritize a borrower’s income more than collateral when considering a mortgage-backed loan, and in principle cannot offer any grace period in future consumer loans. Mortgage lenders must apply an interest-rate stress test to assess whether a borrower can still afford their payments when the benchmark rate goes higher and restrict the loan limit. They will study other debt a borrower may have before giving a new mortgage-backed loan.

But we suspect a political purpose in the new measures. In July, the government announced it will strengthen consumer loan screening from Jan. 1. In Monday’s announcement, the set of new guidelines will be enforced on mortgage lenders from February 2016 in Seoul and May everywhere else. The nationwide enforcement was pushed back after the April parliamentary election.

The surge in household debt that has been increasing by 10 trillion won ($8.45 billion) a month will continue through next year. Various exceptions were also applied to group loans for applicants looking to purchase units in an apartment complex planned for or under construction. The surge in such loans takes up the biggest part of the increased household debt. The new guidelines were announced by the Korean Federation of Banks instead of the government and are not necessarily binding.

The new measures have been set amid inter-government discussions with the Ministries of Land and Finance, telling financial authorities that strengthening loan regulations could dampen recovery in the housing construction sector.

The International Monetary Fund renewed its warning about Korea’s household debt level. The state-run Korea Development Institute also advised that reining in household debt is more urgent than sustaining recovery in the construction sector. The debt-financed real estate recovery shows signs of fizzling out. The U.S. Federal Reserve is most likely to raise the policy interest rate for the first time in more than nine years.

Korea will inevitably have to follow the international trend of raising lending rates. When the lending rate goes up by just 0.25 percentage points on the household debt of 1,200 trillion won, extra interest burden shoots up by 3 trillion won for the full year. Home value also could crash and spill over to the economy. Who will be responsible when that happens?

*JoongAng Ilbo, Dec. 15, Page 34

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