Easing the market shocksThe government has further tightened loan regulations to strictly restrict new lending to multi-debt holders and homeowners from next year. Lenders now must consider all outstanding debt including mortgages, credit card and auto financing when reviewing applications for new loans. The more debt or homes one owns, the more difficult it will become to borrow. Tougher loan regulations — known as the debt service ratio — will count in a potential borrower’s debt obligations to the borrower’s income from the second half of 2018.
Not only will the pipeline tighten, the borrowing costs will also go up. The Bank of Korea is expected to push up the base rate at the upcoming monetary policy meeting on Thursday in pre-emptive action because if it is kept unchanged, the U.S. Fed fund rates will become higher after a highly-anticipated 25 basis point hike at the Fed Reserve meeting in December.
The days of easy and cheap liquidity are coming to an end. A 25-basis-point jump to 1.5 percent in the base rate does not mean interest rates are suddenly high. But the move is a dramatic turn in the direction in the monetary easing policy kept intact for the last decade. Real estate prices have shot up despite economic slowdown because interest rates have been low. Household debt snowballed because of the benign lending rates.
But that is no more. There is a limit to what the central bank and government can do. Household debt has reached 1,419 trillion won ($1.3 billion). The interest rate goes up by 2.8 trillion won when the rate moves up 25 basis points. Households must make deleveraging efforts. More importantly, the government must boost jobs and income to strengthen people’s capacity to afford their debt load. It must radically remove regulations and pave the way for new innovations and jobs. Our future hinges on the moves we take at this transitional point.
JoongAng Ilbo, Nov. 27, Page 34