The Bank of Korea argued that real estate policy loans should gradually be included in the total debt service ratio (DSR) regulation. This is due to the point that policy financing supporting housing purchases can fuel rising housing prices.
According to the 'Financial Stability Report' published by the Bank of Korea on the 25th, the balance of policy loans for households for housing policy financing as of the end of last year amounted to 315.6 trillion won, while the balance of public guarantees reached 598.8 trillion won.
Among policy loans, housing mortgage loans (239.5 trillion won) accounted for 75.9%, while leasehold loans (76.1 trillion won) accounted for 24.1%. In terms of public guarantees for individuals, leasehold-related guarantees (leasehold loans of 143 trillion won and lease deposit returns of 144.6 trillion won) were expanded to about half (48.1%) of the total guarantees.
In terms of the size of policy loans by supplying institution, the Korea Housing Finance Corporation’s balance stood at 181 trillion won at the end of last year, accounting for 57.3% of the total, while the housing & urban fund provided 134.6 trillion won.
The Bank of Korea expressed concern that the expansion of policy financing could spur rising housing prices. According to the Bank of Korea, the expansion of policy financing related to leasehold from 2018 to 2019 coincided with a relaxation of financial conditions post-COVID-19, impacting the rise in lease prices. In 2023, the expansion of policy financing that supports housing purchases has led to an increase in housing transaction prices.
In particular, the Bank of Korea pointed out that attention should be paid to the increased upward pressure on housing prices as interest rates have entered a downward trend. The risk index of the housing market, which measures the risk of overheating or recession, showed that the financial imbalance risk in the Seoul housing market, evaluated through this index, somewhat eased after peaking in 2020-2021 but is rapidly rising again recently.
The Bank of Korea stated that the scope of DSR application for policy loans should be gradually expanded. Currently, policy loans are excluded from DSR regulation, only subject to the debt-to-income (DTI) regulation focused on housing mortgage loans, indicating a need for stronger loan management.
According to an analysis by the Bank of Korea, if policy loans are included in the DSR regulation target, the proportion of DSR regulation applied to the total household loan balance will increase by 5.6 percentage points (p). Based on this, the Bank of Korea argued that expanding the scope of DSR application would enhance policy effectiveness.
The Bank of Korea remarked, "Just as DSR regulations apply to general housing mortgage products, the scope of DSR application should gradually be expanded to policy loans,” adding that “For policy loans for dwellings located in the metropolitan area, DSR regulations at a similar level to the current DTI regulatory ratio (60%) should be introduced, and the option of strengthening or expanding them in the future should be considered."
However, the Bank of Korea noted that housing policy financing has a positive aspect in supporting vulnerable populations in acquiring homes, thus proposing an expansion of targeted support for low-income groups. The Bank of Korea stated, "For low-income vulnerable households, it is important to continue to supply policy financing at low interest rates as before, and to expand the benefits that apply to those categorized as needing policy consideration for leasehold loan guarantees from policy financing supplying institutions."