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Characteristics and Implications of Rising Household Debt: Pre-and Post-deregulation of Mortgage Loans

Jiseob Kim, Fellow 2016/11/24
■ Although the deregulation of the real estate finance market has not diminished households’ financial stability to any significant degree, a shock such as a rise in the interest rate may weigh down heavily on households in the short-run.

○ Despite the rapid increase in the aggregate household debt, the rise was mainly led by high-income households with relatively stable income and response assets. As such, households’ financial stability has not been significantly affected.

○ However, due to the recent rapid rise in interest rates, households’ financial stability may turn negative in the short-run as a result of unexpected shocks.

- If household income is negatively affected or interest rates rise, the DSR and LTV ratio will swing upward in the short-term and households’ general economic activities will be restricted.

- Households with a sharp increase in the LTV ratio post-deregulation may be particularly vulnerable to external shocks as the majority of their loans are used for business operations, debt repayment and living expenses.

■ Preemptive measures are needed to enhance marginal households’ financial stability in preparation for internal and external shocks as mortgage regulations are strengthened to curb the increase in household loans.

○ Aggregate household debt has hovered far above income growth since the easing of regulations on DTI and LTV ratios. As such, the regulations should be reversed to previous levels and collective loans should be placed under much stricter supervision to curb the increase in household loans.

- Substantial repayments are currently not required for collective loans, meaning that a much heavier repayment burden could weigh down on households later.

○ At the same time, efforts are also needed to prevent additional increases in the share of households with extremely high DTI ratios or rapidly increasing LTV ratio.

- Households with high DTI and LTV ratios are most likely high-risk borrowers (over-indebted persons, multiple debtors). Therefore, efforts are needed to induce a systematic payment of the principal and interest and to apply tighter screening measures for additional loans.

- Considering that households with variable rate loans are exposed to shocks to both income and interest rates, consistent efforts are needed to assist them in transitioning to fixed rate loans.

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