[Editorial] Predictability matters

The Financial Services Commission, South Korea’s top financial regulator, has suddenly delayed the planned implementation of the second phase for tighter debt service ratio limits. But the delay is feared to send misleading signals to the financial and real estate markets.

The FSC announced Tuesday that tougher rules on household loans will be applied from the beginning of September, instead of July. The decision for the two-month delay came less than a week before the new rules were to be applied, raising questions about why the authorities made such a last-minute move that could cause confusion about the government’s policy direction.

DSR is the ratio of a household borrower’s total debt repayment -- principal and interest payments -- to his or her annual income. This works as a ceiling on aggregate lending, and the government has mapped out a three-phase implementation of tighter lending DSR rules -- stressed DSR -- which factor in the possibility of higher future interest rates to rein in growing household debt and ensure stability in the event of future rate hikes.

The first phase came into effect on Feb. 26, reducing the amount of money people can borrow from banks when they buy houses. The second phase, which will expand to the second-tier financial market, will further add to interest rates in a way that makes it more burdensome to take out loans. The third and final phase, temporarily scheduled to take effect from July next year, will impose more restrictions.

The FSC said its decision to delay the second phase of DSR implementation is aimed at helping small business owners and low-income earners to grapple with financial difficulties, and ensuring a soft landing of the real estate project financing market.

The FSC said the delay would help about 15 percent of borrowers in the second-tier financial market who are projected to end up with a cut in the amount they can borrow when the second phase goes ahead as scheduled.

But it seems unlikely that the longstanding troubles with cash-strapped small businesses and the risk-laden PF market could be resolved with a two-month postponement.

Critics also argue that the FSC’s move contradicts the Yoon Suk Yeol administration’s policy of curbing and managing overall household lending. Financial authorities have urged major banks to limit the growth rate of household loans within the country’s GDP growth rate. As of June 13, the household loan growth rate of the top five banks reached 707.6 trillion won ($509.9 billion), up 2.2 percent from the end of last year. This is alarmingly close to 2.5 percent, the latest 2024 GDP growth forecast by the Bank of Korea.

The bank loans expanded at a fast pace largely due to lower mortgage rates, which now range between 2.9 percent and 5.4 percent, reflecting the outlook that benchmark interest rates are expected to be cut in the second half of this year.

The average apartment prices in the Seoul metropolitan area have risen for the 13th straight week. The volume of property trades also was the highest since 2021. The combination of lower interest rates and higher housing prices, however, could lead to more borrowing for speculative investment, a toxic recipe for a sharp increase in household debts and volatility in the property market.

Given the recent market trends saddled with explosive problems, the government must avoid sending misleading signals. In this regard, how the market will react to the FSC’s abrupt decision should be watched closely.

Equally worrisome are the contradictory signals from the government, which pushed to put more limits on household loans through stricter DSR rules. In recent weeks, officials from the presidential office and the ruling People Power Party have also made comments encouraging the central bank to slash the benchmark rates.

But it is uncertain whether the merits of a premature rate cut will outweigh the potential side effects such as a spike in irresponsible lending. The government and financial authorities should aim for consistency and predictability in policy implementations rather than opting for surprise and unconvincing last-minute changes in planned schedules.