Korea Encourages Stricter Loan Screening Amid Record Debt

  • Government focus on collective loans by new apartment buyers
  • Accelerating pace of household debt concern for policy makers

South Korea’s government said it will introduce risk management practices for some types of real estate loans as household debt has climbed to a new record.

The government will encourage banks to impose stricter loan screening for so-called collective loans by buyers of new apartments, which have led recent mortgage growth, according to a joint statement from government ministries on Thursday. 

The pace of household debt has accelerated in recent years as the Bank of Korea lowered rates to unprecedented levels and the government eased property regulations to support the economy. The booming property market has played a key role in sustaining the economy, yet mounting debt is a risk if households are unable to repay the loans.

Governor Lee Ju Yeol said at a press briefing this month that the BOK is monitoring debt growth as it raises risks to financial stability and that previous measures on stricter loan screening haven’t yet had meaningful results. 
Household debt including credit purchases rose by 33.6 trillion won ($30.1 billion) in the second quarter to 1,257.3 trillion won, the central bank said Thursday in a separate statement. The government said it will manage the supply of housing on lands offered by Korea Land & Housing Corp. to maintain an appropriate level and encourage borrowers of long-term “jeonse” rentals to take out amortized loans.

Debt Quality

An increase in the supply of new homes can lead to oversupply, raising concerns about deterioration in quality of debt if risks to the housing market grow, the government said, adding that supply needs to be managed. 

“Today’s measures show the government’s focus is on managing and reducing the volatility of the long-term housing supply,” said Kim Duck Rye, a research fellow at Korea Housing Institute. “The changes could affect collective loans, depending on how strongly banks start checking borrowers’ income.”

The growth in mortgages to individual borrowers slowed in the first half of 2016, while loans made via collective lending accelerated, the government statement showed. Collective loans refer to those made by banks to a group of people who buy units in the same apartment. These loans, which weren’t restricted by previous government measures on household debt, increased as the supply of new apartments soared.

Thursday’s statement expands the July 2015 measures, which require banks to impose stricter standards in assessing a home buyer’s ability to repay a loan and encourage fixed-rate, amortized mortgage loans.

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