South Korean financial authorities, which had been expanding policy-based home loans, abruptly began pressuring banks to tighten lending when bank mortgages surged by more than 5 trillion won (approximately $3.62 billion) in May. As a result, mortgage rates, which had previously dropped to 2 percent annually, climbed back to 3 percent. This reflects a contradictory policy stance of encouraging lending on one hand while simultaneously imposing restrictions on the other.
To prevent sharp fluctuations in the real estate market, the government has been providing 30 to 40 trillion won in low-interest home loans annually since last year. Regulations to reduce loan limits initially planned to extend to the secondary financial sector this month, were suddenly postponed to September. This delay impacts policies aimed at curbing the trend of young borrowers taking on excessive loans. The government explained that the decision was made to support self-employed individuals in need of quick loans and to ensure a soft landing for real estate project financing (PF). However, a two-month delay in lending regulations is unlikely to resolve these issues. Simultaneously, the government is tightening bank lending to curb real estate funding, indicating a lack of clear direction.
Balancing the dual goals of gradually controlling real estate prices and curbing household debt is extremely challenging. However, government policies should maintain at least a basic level of consistency. The government’s inconsistent actions foster distrust, diminishing their effectiveness. Although the Minister of Land, Infrastructure, and Transport warned, “Interest rates are still high, so you shouldn’t engage in gap investments or short-term investments,” this warning has not resonated with the market. The trend of the 2030 generation taking on massive debt to buy apartments has resurfaced. With expectations of rising house prices, Seoul apartment prices have increased for 13 consecutive weeks, and from January to May this year, the number of first-time homebuyers in their 30s in Seoul surged by 70% compared to a year ago.
Household debt approaching 2,000 trillion won is a ticking time bomb for the Korean economy. The government faces the conflicting goals of gradually adjusting real estate pricing policies and curbing household debt. While it is understandable that the government is grappling with these contradictory policy challenges, its role is to resolve them. At present, however, it appears to be failing in this responsibility.
