FSC’s Lee Says Household Loan Cap Adjustment Must Aid Real Demand, Not Spur Speculation

Joint government meeting on rising household debt

Lee Eok-won, acting chairman of South Korea’s Financial Services Commission, said the government’s adjustment of household loan volume targets is meant to support genuine demand and must not be taken as a signal that could fuel speculation.

Lee spoke at a joint government meeting on rising household debt at the Korea Federation of Banks on August 14. With household loan targets adjusted on what he called a reasonable basis, he asked lenders to ensure funds for end-users are supplied in a timely and stable way.

The meeting was attended by officials from the Ministry of Economy and Finance, the Ministry of Land, Infrastructure and Transport, the Bank of Korea, the Financial Supervisory Service, Korea Asset Management Corp., or Kamco, Korea Development Bank, Korea Housing Finance Corp., Housing and Urban Guarantee Corp., or HUG, and SGI Seoul Guarantee. Also present were the Korea Federation of Banks, associations representing non-bank financial institutions and the country’s five major commercial banks.

Participants reviewed July household lending trends and discussed implementation of the comprehensive financial measures for stabilizing the real-estate market announced a day earlier.

Household loans across all financial institutions rose 6.2 trillion won last month, the Financial Services Commission said. That was down from an 8.3 trillion won increase a month earlier.

Mortgage lending rose 3.5 trillion won, slowing from 4.5 trillion won in the previous month. Growth eased at both banks, where mortgage loans increased 3.4 trillion won after 4.3 trillion won, and non-bank lenders, where the increase slowed to 100 billion won from 300 billion won.

Other loans rose 2.7 trillion won, compared with 3.8 trillion won a month earlier. The slowdown was driven largely by softer growth in unsecured credit loans, which increased 2 trillion won after 2.6 trillion won.

By sector, household lending at banks increased 5.4 trillion won, down from 7.6 trillion won in the previous month. Growth slowed in bank-originated mortgages, which rose 2.5 trillion won after 2.9 trillion won, and in policy loans, which increased 900 billion won after 1.4 trillion won. Other lending also slowed to 2 trillion won from 3.3 trillion won.

Household loans at non-bank financial institutions rose 800 billion won, little changed from the previous month. Mutual finance lenders swung to a 700 billion won decline from a 200 billion won increase, while savings banks and credit finance companies returned to growth. Savings banks posted a 500 billion won increase after a 200 billion won decline, and credit finance firms recorded a 300 billion won increase after a 200 billion won decline.

Authorities are focused not only on the moderation in growth but also on the absolute size of lending. Compared with historical averages, borrowing is still rising by a large amount, and annual volume-control limits are being used up quickly.

Household loan growth remains high relative to past averages, Lee said, and the pace at which annual volume-control ceilings are being exhausted means there is little room for complacency.

He also cautioned that rising home transactions in the Seoul metropolitan area could push household borrowing higher again.

Apartment transactions in the capital region rose from 21,000 units in both November and December last year to 23,000 units in January. The figure edged down to 22,000 in February before climbing to 27,000 in March, 28,000 in April, 29,000 in May and 30,000 in June.

Housing transactions, especially in the capital region, have been rising steadily, he said, adding that demand for household loans is therefore likely to remain elevated for some time and will require more active management.

The government is tightening control over household debt while redirecting credit supply because it does not want broad volume restrictions to constrain areas where funding is genuinely needed.

Referring to demands raised at three real-estate policy forums held last month, Lee said speculative demand must be controlled more firmly while financing should flow more smoothly to actual homebuilders and end-users.

The comprehensive financial package announced a day earlier was therefore designed to maintain controls on housing demand while expanding support for housing supply and for end-users, including young people.

The government said it would provide sufficient public guarantees to viable projects to speed housing starts and boost supply. For suspended projects, it plans to combine restructuring with fresh funding to help restart construction.

It also plans to improve related systems and ease regulations so private capital can flow into housing supply projects.

Authorities will also speed efforts to normalize troubled real-estate project-financing sites. Lee asked Kamco to prepare to launch a new normalization fund quickly and strengthen links with syndicated loans and financial-sector normalization funds.

Financial institutions were told to work with the Financial Supervisory Service to assign staff to each troubled project included in their own normalization funds, and to draw up and carry out implementation plans so those sites can be restored quickly.

Lee also asked Korea Housing Finance Corp. and HUG to support swift construction starts in housing projects by providing ample guarantees.

Financial support for young people and end-users will also be expanded. The government plans to launch a three-part housing support package tailored to younger people’s housing needs. It will also revise income requirements for Bogeumjari loans so eligibility is based on one spouse’s income rather than combined household income, partly easing what is known as the marriage penalty.

The government also plans to revise debt service ratio, or DSR, income screening so future income growth for younger borrowers is adequately reflected.

At the same time, the government will adjust household debt volume-control targets for financial institutions so funds needed for housing supply and genuine demand can be provided more steadily.

Lee asked lenders to make full use of the added lending capacity created by the revised targets so financing for relocation costs, interim payments and final home-purchase payments can be supplied in a timely and stable manner.

Still, he drew a clear line against any interpretation that the target adjustment amounts to an easing of real-estate lending rules.

“The adjustment to the household loan target is a measure to support genuine demand,” Lee said. “It must not become a signal that stimulates speculative loan demand.”

The government’s message was that it will continue to control the overall pace of household borrowing growth while easing funding constraints only for housing supply and genuine end-users.

Noh Jung-dong, Hankyung.com reporter dong2@hankyung.com