[Editorial] Delicate steps needed

The financial authorities are reining in household debt. Commercial banks have started to suspend the issuance of home loans. NH NongHyup Bank suspended all mortgage lending and loans for “jeonse” -- South Korea’s rent-free, deposit-only home leasing system -- until Nov. 30. Switching and renewals of mortgages were halted as well. Woori Bank temporarily stopped offering jeonse loans to tenants.

If borrowers rush to other banks, home loans available at banks will likely be exhausted rapidly. Conscious of the authorities’ move to curb household debt, the banks may reduce their credit lines voluntarily.

The extension of personal loans was tightened as well. The Financial Supervisory Service recently asked banks to reduce the upper limit for unsecured personal loans that don’t require any type of collateral to within the annual incomes of borrowers. Authorities also reportedly set the same guidelines on unsecured personal loans for nonbanking financial companies, such as savings banks and insurance companies.

It is concerning that home loans have surged this year. They reached a record 1,765 trillion won ($1.51 trillion) as of end-March, up 9.5 percent from a year earlier, according to Bank of Korea data, exceeding the targeted home loan increase rate of 6 percent. Early this year, the financial authorities advised banks to limit their annual year-over-year increase rate for home loans to 6 percent or less.

The ballooning household debt could become a terrible burden on the country’s economy, if it is coupled with an impending interest rate hike and the property bubble bursts. It is important and urgent to keep household debt in check. There is no disagreement on that. Lenders need to act preemptively.

But the abrupt suspension of loans is feared to aggravate the pain of working-class households and cash-strapped self-employed businesspeople. In particular, small businesses such as restaurants and cafes are undergoing unprecedented financial hardships due to the prolonged COVID-19 pandemic. The rapid increase in personal bankruptcies this year occurred largely among the self-employed.

It is too much to shut down credit lines suddenly without giving appropriate notice. Those in immediate need of money will likely resort to illegal private lenders if they find it too difficult to get loans from legitimate financial institutions.

The financial authorities say they are suppressing loans that can be used for speculation, but it is not easy on the working level to tell whether a specific loan is to be used speculatively or not. It can’t be said that all of the increase in home-backed borrowing this year stemmed from speculative demand.

The household debt surge was largely caused by skyrocketing home prices. The increase of liquidity due to COVID-19 stimulus and relief measures and real estate policy failures combined to push up housing prices. This led to a surge in home-backed borrowing. Ascribing housing price hikes to home loans is like the tail wagging the dog.

The prices of apartments in Seoul have nearly doubled in the past four years under the administration of President Moon Jae-in. Three laws on house leases enacted unilaterally by the ruling Democratic Party of Korea, which holds a large majority in the parliament, produced the serious side effect of driving up jeonse prices, which in turn stimulated home price hikes. This vicious circle panicked many workers into rushing for loans to cope with exorbitant jeonse deposits or monthly rents, but the suspension of loans has now made it practically impossible to get them.

It is no wonder, then, that people condemn the government for blocking home loans as it has failed to bring down housing prices. They complain, “Are you telling us to keep living in rented houses?” “Do you intend to kick us out on the street?” or “Do only the people rich in cash deserve to buy homes?”

The difficulty of increasing the housing supply is understandable, but suddenly blocking home loans in one broad stroke is embarrassing. Authorities must work out delicate and refined supplementary follow-up measures to ensure that the financially disadvantaged -- who have nothing to do with speculation -- will not be hurt.

By Korea Herald (koreaherald@heraldcorp.com)