Stabilizing the housing market is top priority

The fundamental cause of the rise in household debt is surging real estate
prices.

Kim Dong-ho

The author is the business news editor of the JoongAng Ilbo. Household debt is accumulating endlessly. When the Bank of Korea’s new national accounts statistics is applied, the household debt-to-GDP ratio reached 93.5 percent at the end of last year — the highest among major economies.

The fundamental cause of the rise in household debt is surging real estate prices. Let’s review why real estate is behind the increase in household debts.

Real estate is always in high demand in Korea due to the country’s high population density. The demand for new couples’ homes is rising in addition to the demand from 10 million single-person households. Even if you save all you earn, an apartment price is beyond reach.

In Seoul, an apartment costs more than 1 billion won ($719,890) on average. Even if a child inherits it, not much is left after high gift and inheritance taxes. With the aging population, the timing of gifts and inheritance is also delayed. After all, generations of children, following their parents, spend their youth buying a house. In Korea, 70 percent of household assets are real estate. The life of Sisyphus pushing a rock up a mountain forever is repeated from generation to generation.

The real estate dilemma of Korean households is getting more and more twisted. The situation got worse with the involvement of political logic in real estate. Since the days of President Park Chung Hee, the real estate policy mainly focused on supply. But the comprehensive real estate tax — introduced by the Roh Moo-hyun administration in 2005 — deviated significantly from market principles and concentrated on suppressing demand.

In 2017, the Moon Jae-in administration further raised the comprehensive real estate tax. Following the Roh administration, housing prices rose vertically throughout the Moon administration, followed by a national craze of real estate speculation and a surge in household debt.

The policy to “control housing prices” will likely continue. If the government can tame soaring housing prices, “torture by hope” could be accepted. But such hope is meaningless, as statistics show the reality. As housing prices rose during the Moon government — coupled with shocks from recent high interest rates — the real estate that was slow for a while is moving again.

There are complex reasons why, but there seem to be two direct causes. The first is the looming sign to ease the extremely high interest rate in the past two years and the second is the supply cliff for apartments in Seoul. The conservative Yoon Suk Yeol administration promised to supply 1.6 million apartment units in the capital region within five years, but no progress has been made due to rising construction costs from high interest rates and inflation and a critical lack of land.

Housing prices become unstable because of insufficient supplies despite endless demand. Anxiety is deepening as the lease deposit price in Seoul rose for 57 consecutive weeks since May 2023.

In the aftermath, people are taking out maximum loans, and household debt is on the rise again this year. A significant part of the debt is mortgage loans. As of May, the balance of household loans in the banking sector increased to 1.1 quadrillion won.

The government has started to curb household loans. The debt service ratio (DSR) will be tightened from September. In addition to the ability to pay back from an income, the risk of rate fluctuation is reflected to strictly review the repayment ability of borrowers. If someone who makes a 50 million won annual salary takes out a 40-year mortgage loan, they could get a loan of 398.8 million won at the beginning of the year. This amount was reduced by 21.8 million won in February and will be down by another 20 million won from September. It will be further reduced from January next year.

Even when it becomes harder to get a loan, people take out maximum loans if possible. It becomes especially easier for those who can get help from parents. The rich get richer, the poor get poorer. It is a vicious cycle with no end in sight.