The strengthened loan regulation, the second phase of the stress DSR (Debt Service Ratio), was implemented yesterday, on the 1st. Now, the housing mortgage loan limit in the metropolitan area is expected to decrease by about 36 million won compared to August. Of course, this varies case by case for individuals, but this is the average based on income. We will take a detailed look at how loan regulations will change and what impact they will have on housing prices. We have Professor Lee Jeong-hwan from Hanyang University’s Department of Economics and Finance with us. Hello. 

Yes, hello. Today, we will discuss the second phase of the stress DSR. However, DSR can be difficult to understand, especially the stress DSR. Let’s start by having you explain what DSR and stress DSR are, and then we can move on to the first and second phases. Let's begin with the concept clarification. What is the DSR and stress DSR?

The Debt Service Ratio (DSR) refers to the ratio that determines how much of our income can be allocated to debt repayment. If we have a higher income, we can repay half of the principal and interest. Conversely, if our income is lower, our ability to repay the principal and interest is naturally reduced. This ratio is fixed at a maximum level. Essentially, if my income is low, there is a certain amount I need to repay in terms of principal and interest, but my ability to incur debt and repay it is limited by my income. 

However, when we look at the existing DSR, we see that the loan amount is determined at the time of borrowing. Since the interest rate is fixed at that time, the principal and interest are clearly defined, and according to the National Tax Service data, my income is...

When we compare the lower income brackets, it is important that the proportion of principal and interest does not exceed 40% of income. If it exceeds 40%, then it becomes difficult to repay the debt. It’s not that one cannot repay, but the burden of debt on households becomes too severe, so the idea is to impose such a limit. On the other hand, there are some issues with the existing DSR (Debt Service Ratio). When interest rates are lowered, it’s not a problem, but if interest rates rise, the cost of interest will inevitably increase. If we enter a high-interest rate environment, especially those who borrowed at variable rates will face higher interest payments. Considering the increased interest payments, we should set limits on how much we can borrow. This is the overarching idea behind what is commonly referred to as the stress DSR, which accounts for the potential increase in interest rates.

Assuming the situation, we are ultimately in a position to adjust the loan limits. So, if you think about it, when we calculate the Debt Service Ratio (DSR), the denominator will include my annual income, while the numerator will consist of all the debts I have, which will be repaid in annual principal and interest. Therefore, the current percentage at banks is around a certain figure, but in the financial sector, it can be around 50%, allowing for more room. This is DSR. However, considering the interest rate hike, we might need to recalculate this, which is why we apply an additional interest rate, leading to what is called the stress DSR.

Now, what we are curious about is the two-step process that was implemented starting yesterday. What was the first step, and what is the second step? Can you explain the virtual interest rate range for both steps? The anchor has accurately pointed out that the key issue is how to determine the range of the virtual interest rate. In fact, all financial policies are related to this.

If it suddenly changes like this, it can be a shock, and the perception of people is that the financial market may endure for a long time. When we implement the stress DSR, the virtual interest rate that you mentioned should ideally increase by about 1.5%. In the first stage, we plan to raise it by about 25%, and in the second stage, by 50%. So, in terms of interest rates, it will increase by 50%. When we reach the third stage, we will truly reflect the entire 1.5% increase. It should be noted that the previous stages were not just the first, second, and third stages. 

Additionally, in the first stage, we will apply this to bank loans. In the second stage, we will apply it to bank mortgage loans and credit loans. Furthermore, we will also consider the mortgage loans from the so-called secondary financial sector.

It was mentioned that we would apply this, and now if we move to the third stage, the application will expand. Ultimately, all types of loans, including mortgage loans, credit loans, and other loans, will be included, and this situation will progress in both banks and non-bank institutions. 

Furthermore, the second stage was supposed to be implemented in July 2024, but there were concerns that it might put a burden on housing prices. In other words, there were opinions suggesting that it might be a burden for those looking to buy a house. As a result, what was planned for July was postponed to September. In fact, the third stage is expected to occur around early next year, according to evaluations from financial institutions and experts. 

Regarding the second stage, it has been noted that the additional interest rate applied in the metropolitan area is 1.2%.

The point for non-capital areas is 0.75%, while for capital areas, it is 1.5%. This is almost entirely applied to the capital areas. Virtual interest rates have reached this level. Many people say we are now in the second phase, or what some call the 2.5 phase. Originally, it was expected that an increase of 0.75% would have been implemented in July, regardless of the capital or non-capital areas. Currently, the situation in the capital areas is quite unusual, especially in Gangnam, where real estate transactions are surging. Consequently, the issue of household loans has become serious. In the end, there are hardly any people who want to buy a house without debt; those who only buy with their own money are insufficient. Therefore, while reducing the scale of household loans, there is talk of shrinking the supply of household credit. This is intended to stabilize the housing market and household stability, especially since real estate transactions are active.

The increase in real estate prices has been significant, particularly in the so-called metropolitan area, which has led to a rise in stress interest rates. Consequently, it can be said that the number of loans has been significantly reduced. We need to conduct a simulation. This will vary greatly depending on personal income and whether one is in the metropolitan or non-metropolitan area. For example, let's take a borrower with an income of about 50 million won in the metropolitan area. After the implementation of the second stage, let’s see how much their loan through mortgage loans is reduced. In this case, if we use a variable interest rate, a borrower with an income of 50 million won—this is based on the National Tax Service income, which may differ slightly from general income—could ultimately borrow up to 310 million won, which was possible until just the day before yesterday.

Nonetheless, when the second phase begins, I mention that the virtual interest rates will change. The stress interest rates add 1.2 percentage points for the metropolitan area and 0.75 percentage points for non-metropolitan areas, which shows that non-metropolitan areas have a slightly increased borrowing limit compared to the metropolitan area. However, compared to the first phase, where it was 0.35 percentage points, it has risen. In the metropolitan area, one can borrow up to approximately 287 million won, while in non-metropolitan areas, the borrowing limit is around 320 million won. This is the current situation. There is also a discussion about hybrid types; hybrids involve a mix of fixed interest rate declines. The fact that variable and fixed rates are mixed means that the fixed rate has already been determined, so when we talk about stress DSR, there are aspects where one can receive some benefits.

There was a difference between variable and fixed interest rates, which is the reason for the changes. Previously, the amount was 320 million won, but now it has become 330 million won in the metropolitan area and approximately 312 million won in non-metropolitan areas. The term periodic type refers to fixed interest rates that change every five years. Originally, it was about 325 million won in the metropolitan area and 320 million won in non-metropolitan areas, showing some variations. The key point is that more is offered in the metropolitan area, but there are also offerings in non-metropolitan areas. This should be understandable. People who are purchasing homes usually have a credit score of around 50 million won. Previously, it was possible to borrow up to 300 million won, but now when buying a house in the metropolitan area...

After September 1st, the amount will be around 280 million won, so the amount we talked about earlier will be reduced by about 30 million to 35 million won. Through these loan regulations, the authorities seem to be trying to manage household debt and housing prices. However, one more thing is that currently, when calculating my total debt for DSR (Debt Service Ratio), jeonse (long-term rental) loans are not included. Those will be factored in later on. Separately, there are regulations on jeonse loans themselves, which is a different matter. This is somewhat different. What I can say is that the anchor mentioned that DSR might apply to jeonse loans as well, but whether this will happen in the third stage is still undecided. It seems to be in a somewhat uncertain state. The reason is that jeonse loans are closer to loans for the common people, and since their maturity is two years, there is a certain burden regarding the DSR calculation.

That part is still a topic of debate regarding whether to continue with the third phase of discussions. So, it seems that, in fact, there are strong regulations on lease loans, aside from the Debt Service Ratio (DSR), as general loans are also being reduced. The banking sector is, in a sense, implementing these regulations voluntarily. Ultimately, banks need to cooperate to ensure system risk stability. In this cooperative context, they are researching methods to voluntarily reduce loan limits and decrease lease loans, essentially looking for ways to mitigate the increasing amounts.

The easiest way to increase the DSR adaptation range is to increase the amount of principal we need to repay. One way to particularly increase the principal repayment is by shortening the loan term. When the term is shortened, what usually happens is that the principal repayment must be made more quickly.

As the repayment period of the principal increases, the burden of principal and interest also rises. Consequently, the Debt Service Ratio (DSR) effect may be felt more strongly. In the past, many people opted for 50-year loans, which contributed to the rise in housing prices. It was often discussed that the prevalence of these long-term loans was problematic, potentially distorting the housing market. However, institutions like KB and Shinhan Bank have recently decided to focus on selling 30-year products instead of 50-year ones. This shift aims to apply the DSR regulations more actively regarding the repayment ratio. Additionally, while housing loans are typically used for purchasing homes, those who already own a house may also need to borrow for living expenses. When they urgently need funds, they may find themselves in a position where they need to take out additional loans.

It can be done, but they are saying that they will limit the emergency loan to 100 million won, meaning they will not lend more than that. After that, regarding jeonse loans, KB Kookmin Bank is commonly talking about increasing the amount. When taking out a new jeonse loan, they are saying they will only lend the additional amount compared to the existing jeonse loan. Furthermore, they will not provide jeonse loans for transactions such as buying and selling the house or extending the jeonse, especially if there is a change in the landlord. This can be seen as a form of overall regulation. 

As for Woori Bank, they are taking a strong stance; those who own houses in the metropolitan area cannot get additional housing loans. Woori Bank has also completely suspended jeonse loans, which is currently the most stringent measure.

The policy of our bank is to cooperate with the authorities, and I think it's good for those who are dealing with our bank to keep this in mind. There was a reason for this. Looking at the household loans of the five major banks, we see that they increased by 5 trillion won in May, almost 6 trillion won in June, 7 trillion won in July, and 8.3 trillion won in August. With such increases, the authorities are also worried. How can we handle such rising debt? Now that it's September, we are at the second stage of stress testing for the DSR. As you mentioned, it is becoming a bit stricter, around 2.5. Do you think we can control household loans? The biggest problem with household loans in our country is that they are not solely determined by the loans themselves or the interest rate mechanisms, but are heavily dependent on the real estate market. Recently, the transaction volume has also...

Similar reports are coming out that the real estate transaction volume in Seoul has exceeded 10,000. This raises the question of whether the real estate market is indeed very active. However, this could also be a form of exploitation. It is anticipated that once certain measures are implemented, many people might buy and sell homes in advance, which could lead to an increase in transaction volume. Nevertheless, if the trend is not confirmed, it seems that the demand for household loans could increase. What this means is that a high volume of transactions could lead to a rapid rise in home prices. As a result, people wanting to buy homes might feel compelled to stretch their finances, ultimately deciding to pay more or reduce their living expenses in order to afford a home. Earlier, we talked about educational expenses before the news.

We've talked about various issues, and I can't help but think that a time will come when we have to buy a house, even if it means reducing education expenses. This leads to a situation where we have no choice but to gather all our assets to purchase a home. The tightening of household loans this time is essentially aimed at reducing credit supply, which is intended to address the rising prices in the real estate market. Along with this, various government policies are being implemented to quickly stabilize the fundamental issues in the real estate market. Before the implementation of the DSR (Debt Service Ratio), there was a surge in demand that led to an increase in household loans. The amounts of 5 trillion, 6 trillion, 7 trillion, and 8 trillion were precisely aligned with the monthly increases, and while there is a rapid growth aspect to this, it is also a reflection of the real estate market itself.

There is a certain uncertainty and volatility. Because of this high volatility, the government is closely monitoring how to manage the real estate market and household loan policies. It seems that there is a goal to increase household loans while stabilizing housing prices. Professor, what do you think about this? Our real estate regulations have been somewhat reactive, so haven't we been unable to control housing prices? Some people are worried that we should not just step into stage 2.5 but move directly to stage 3. The authorities seem a bit perplexed about this. What is your stance on the early introduction of the DSR stress test in stage 3? I personally believe it should be done. If we want to control the situation, it needs to be implemented, and currently, in terms of credit supply, the DSR is a measure for credit supply.

From a certain perspective, it seems that stress situations are being exacerbated while also being somewhat alleviated. The government is also presenting alternatives to supply. If this does not improve significantly, the current supply remains somewhat uncertain, making it difficult to control housing prices. We need to provide clear signals to the market; moving forward, loans will be offered less frequently. Since it will be hard to obtain loans, it's suggested to delay purchasing a house. Discussions about redevelopment, such as in Bundang and the new city of Shinil, will continue to arise around 2030, so there is a need to keep signaling to postpone decisions. Regarding the three-stage stress DSR, ultimately, when we look at it, it means raising the existing interest rate by about 1.5%. Therefore, the effect itself is, well, as mentioned earlier, it has been halved.

I think it’s necessary to take proactive measures regarding the loan amount. It is important to implement early interventions to stabilize the situation quickly. If we anticipate a decrease in the future, additional demand may surge, driving prices up. This also relates to the credibility of policies. However, considering the urgent issues in the real estate market, I believe there is a clear need to act more swiftly.

Regarding the calculation of the DSR (Debt Service Ratio) in the third stage, there are opinions suggesting that jeonse (lease) mortgage loans should also be included. Another point of view is that DSR cuts loans in relation to income, while LTV (Loan-to-Value ratio) cuts loans in relation to property value. There is a suggestion that we should also adjust the LTV ratio in relation to property values. How do you view this? In fact, if we want to control property prices, we need to address all these factors.

We can say that all means must be mobilized. Then, rather than regulations like real estate taxes, we can see that there are aspects that can be clearly shown in terms of credit supply through market mechanisms. In fact, in 2022, as housing prices were expected to drop significantly, the government eased LTV regulations. They mentioned that while there are areas with a 0% regulation, they would allow up to 30% in some cases, adopting a more lenient stance. This has led to a somewhat slow response, but there are opinions that this has contributed to a recent rise in housing prices. Furthermore, LTV regulated areas have also been significantly reduced and expanded, and by more actively implementing LTV regulations, the ATB regulations are being approached more proactively.

The introduction means that if you used to be able to borrow up to 700 million won for a house worth 1 billion won, now you can't borrow at all, as it has been restricted to 400 million won. This is a regulation that prevents borrowing. It is necessary to actively implement such measures to stabilize household debt. When household debt is stabilized, it ultimately affects the economy of our country, especially consumer spending, which is crucial for people's livelihoods. The state of the economy can significantly impact consumer spending, and the benchmark interest rate can be lowered smoothly. Therefore, I believe we need to create an environment that allows for rapid control and lowering of the benchmark interest rate. What do you think about the current measures in place? Do you think they will help stabilize housing prices? Additionally, this situation mainly applies to Seoul and some areas in the metropolitan region, but when you go to local regions...

There are viewers who say that even in Busan, we are not overheating, yet they still talk about it. This raises concerns for the authorities regarding the implementation of DSR. Is there any clever solution that could combine these two aspects? In fact, the ongoing discussions about the rapid increase in prices in the metropolitan area continue, and the demand for newly built apartments, in particular, has significantly increased. The supply of new apartments is unlikely to increase for a while. The previous government clearly had issues with construction, and now that the effects of that lack of supply are becoming apparent, there are certainly opinions emerging that suggest the need to buy a house. Ultimately, it is a supply issue, and there is a need to increase the supply in the metropolitan area quickly.

There is a need for urgent measures to ensure that the areas where we want to live stabilize a bit. Real estate experts certainly know much more about this, but when it comes to apartment prices, it is relatively easy to assess. This ease of assessment means that the price difference from the top-ranked to the bottom-ranked apartments is clearly defined, as statistics are readily available. The properties may look similar, but only their locations differ, so when prices at the top increase, they inevitably affect those at the bottom due to this structure. Especially when there is no new supply, the clarity of this structure becomes even more apparent. If there were new supply, it could help bridge the gaps in housing prices, but since that is not the case, the situation remains challenging for everyone.

We need to mobilize our efforts to manage household debt and stabilize housing prices. If we don't, the timing for lowering the benchmark interest rate will continue to be delayed. Not only will the timing for reducing the rate be postponed, but we also won't be able to lower the rate quickly. We are actually talking about a neutral interest rate of 2%, which is currently quite high, so we need to act swiftly. There is definitely a need to address this quickly, as it could hinder progress. Therefore, I believe we need to actively supply housing in the metropolitan area to stabilize prices and reduce the gap with regional areas. In summary, we need to establish a comprehensive system to achieve this. In brief, due to time constraints, the Bank of Korea and Governor Lee Chang-yong are continuously monitoring the situation here.

If the situation regarding interest rates is influenced by what the United States does, should we also take action? It seems like it could stimulate loan demand. When the Bank of Korea announced its policies in August, there were discussions suggesting that a cut in October would be a natural progression. However, recent news indicates that household debt has increased by over 8 trillion this year. Given that household debt rose by over 8 trillion in August, it seems we need to consider how to address this issue. There are opinions suggesting that if we can't cut rates in October, we may need to do so in November during the monetary policy meeting. This highlights the severity of the household debt problem. The real estate market could act as a catalyst for a surge in household debt, so it seems the government is closely monitoring the situation. If this household debt continues to rise without control, it could impact the measures taken in September.

I believe that to some extent, things will stabilize, and I predict that as the previously high figures decrease, a more stable situation will emerge. However, predictions are just predictions, and we need to wait a bit to see if they come to fruition. I think a decision will likely be made based on these observations. 

Looking solely at the domestic economy, it is correct for the Bank of Korea to lower interest rates. However, if lowering the rates leads to side effects such as increased household debt and rising housing prices, there is also a possibility that the Bank of Korea may hold off and observe the situation further. 

This analysis has been provided by Professor Lee Jeong-hwan from the Department of Economics and Finance at Hanyang University. Thank you for your insights today.

“주담대 얼마나 나올까?” 2단계 스트레스 DSR 시행…한도 ‘확’ 줄어든다

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