No damage for those in needThe toughest-yet loan regulations have gone into effect. The government is wielding what could be its last card to rein in runaway housing prices. But the universal strictness could dampen normal financial and real estate transactions and shake consumers’ economic activity. Deputy Prime Minister for Economic Affairs Hong Nam-ki announced stronger loan servicing guidelines with the goal of keeping the rise in household debt between 4 and 5 percent next year. To ensure loan affordability, the tougher debt service ratio (DSR) will be expedited from January.
DRS measures the affordability of principal and interest payments from monthly income when banks review a loan request. It takes into account of all forms of debt, including mortgage loans, credit card spending and serviced debt. As a result, total loan cap will come down whenever money is borrowed from a financial institution. Mortgage loans were granted for thousands of dollars in the past even for small income earners if the apartment in collateral has value. But if DSR becomes the key guideline, all other loan regulatory measurements — such as the loan-to-value ratio and the debt-to-income ratio — will become nearly meaningless.
Under the new guidelines, principal and interest payments on bank loans will be limited to 40 percent of borrowers’ income if the amount of loans exceeds 200 million won ($171,380). For instance, an office worker with annual income of 50 million won and with 50 million won in overdraft credit can borrow 240 million won to buy a home worth 600 million won. But under the new guideline, the loan will be capped at 149 million won.
The government’s tough regulation on consumer debt is understandable. Household debt has been snowballing due to cheap interest rates and a surge in housing prices. But due to the radical feature in DSR, the measure should be incrementally implemented. Average apartments cost more than 1.2 billion won and rent prices have also surged. If the government suddenly hits the brakes on loans while housing prices are still sky-high, other side effects will appear.
The government plans to exclude rent loans from DSR and instruct lenders not to refuse loans to pay for subscribed apartments. But the government must first address fundamental reasons for the hikes in housing prices.
We urge financial authorities to carry out thorough supervision so that damages do not fall on consumers.