🚨 Housing Policy Finance Dilemma: Supporting Real Buyers vs Rising Household Debt

Today Korean Economic News | 2025.06.26

📌 Bank of Korea: "Policy finance helped housing stability but also caused debt increases and rising home prices"

💬 The Bank of Korea released an analysis showing that housing policy finance helped stabilize housing for real buyers but also caused household debt increases and rising home prices. Policy loans were excluded from DSR (Debt Service Ratio) regulations, making loan screening easier and increasing borrowing. The expansion of rental-related policy finance in 2018-2019 contributed to rising rental prices, and in 2023, housing purchase policy loans drove up Seoul apartment prices. The Bank of Korea suggested applying DSR regulations to policy loans while maintaining support for low-income borrowers through careful targeting.

1️⃣ Easy to Understand

A government program designed to help ordinary people buy homes has created unexpected problems, despite its good intentions. According to the Bank of Korea's analysis, this system is working like a double-edged sword.

Let me first explain what "housing policy finance" means. This is a system where the government provides loans for buying homes or renting at lower interest rates than regular banks. The goal is to help ordinary people afford their own homes. Examples include Bogeumjari loans, qualified loans, and Buttress rental fund loans from the Housing Urban Fund.

The good effects are clear. More people could buy homes faster, reducing the time they lived without owning property. Also, more people got fixed-rate loans with monthly payments that include both interest and principal. This means safer loans where the interest rate doesn't change and people pay back a little bit of the borrowed money each month.

But problems started here. Policy loans are treated differently from regular bank loans - they don't count toward DSR (Debt Service Ratio) regulations. DSR means "the percentage of your yearly income that goes to paying back all your loans." Simply put, it's a rule to prevent people from borrowing too much compared to their income. Since policy loans were excluded from this rule, loan approval became easier, and people who normally couldn't get loans could now borrow money easily.

What happened as a result? First, household debt grew faster. Second, home and rental prices went up. For example, when rental-related policy finance expanded in 2018-2019, rental prices rose significantly afterward. In 2023, housing purchase policy loans increased and pushed up Seoul apartment prices.

A particular problem was the 50-year Bogeumjari loan introduced in 2023. This loan extended the repayment period to 50 years to reduce monthly payments, allowing people without sufficient repayment ability to get loans. While monthly payments look smaller now, people end up paying much more interest over the long term.

The Bank of Korea suggested applying DSR regulations to policy loans while keeping exceptions for truly needy low-income people. In other words, instead of making loans easy for everyone, they want to carefully select and support people who really need help.

This teaches us that even well-intentioned policies need careful design to minimize side effects while achieving their original goals.

2️⃣ Economic Terms

📕 Policy Finance

Policy finance is financial services provided by the government at better conditions than market rates to achieve policy goals.

• Examples include Bogeumjari loans and Buttress rental fund loans from the Housing Urban Fund.
• It operates for social purposes like housing stability for ordinary people and supporting small businesses.
• Interest rates are lower and conditions are better than regular commercial loans, but targets and uses are limited.

📕 DSR (Debt Service Ratio)

DSR means the percentage of annual income used to pay back all loan principal and interest.

• For example, if someone earning 50 million won per year pays 15 million won in loan payments, their DSR is 30%.
• Financial authorities limit DSR to 40% or less to prevent excessive debt.
• Policy loans have been excluded from this regulation, but recent side effects are being pointed out.

📕 Fixed Rate vs Variable Rate

Fixed rate loans keep the same interest rate throughout the loan period, while variable rate loans change based on market interest rates.

• Fixed rates protect against rising interest rates but usually start with higher rates.
• Variable rates start with lower rates but interest payments can increase significantly when rates rise.
• Policy finance mainly provides fixed rates to reduce interest rate risk for borrowers.

📕 Installment Repayment vs Lump Sum Repayment

Installment repayment means paying both principal and interest monthly during the loan period, while lump sum repayment means paying only interest monthly and repaying the principal all at once at maturity.

• Installment repayment has higher monthly payments but reduces interest burden as principal decreases.
• Lump sum repayment has lower monthly payments but requires preparing a large amount at maturity.
• Policy finance mainly provides installment repayment to encourage stable repayment.

3️⃣ Principles and Economic Outlook

✅ Positive Effects and Intended Results of Housing Policy Finance

• Let's analyze the housing stability effects and household debt structure improvements achieved by policy finance.

  • First, shortening the period without homeownership to improve housing stability was the biggest achievement. Households receiving policy finance support significantly reduced their time without owning homes. The effect was greater for lower-income groups because they could enter the housing market that was previously inaccessible at market rates. Bogeumjari loans targeted households earning 70% or less of median income, actually helping ordinary people buy homes. Special programs for newlyweds and young people also enabled life-cycle housing support.

  • Second, increased fixed-rate and installment repayment loans improved the qualitative structure of household debt. Policy finance mostly provided fixed rates and installment repayment, reducing interest rate risk for borrowers. This was confirmed during the rapid interest rate increases starting in 2022, when policy loan recipients remained relatively stable. While variable rate loan holders faced 2-3 times higher monthly payments, fixed-rate policy loan users maintained predictable repayment plans. Installment repayment also steadily reduced principal, improving long-term financial stability.

  • Third, financial access for vulnerable groups greatly improved. Groups with low credit scores or unstable income could access housing funds through policy finance. It particularly provided opportunities for young people and newlyweds who had income but short credit histories. Buttress rental fund loans greatly helped ordinary people who had trouble preparing rental deposits. This faithfully performed the original role of policy finance in supplementing market failures.

• Housing policy finance achieved clear results in housing stability and financial inclusion, showing that the basic direction of policy design was correct.

✅ Side Effects of Policy Finance and Market Distortion Effects

• Let's examine the side effects from DSR regulation exemption and impacts on the real estate market.

  • First, relaxed loan screening due to DSR regulation exemption caused excessive debt increases. Excluding policy loans from DSR calculations enabled loans beyond borrowers' actual repayment capacity. For example, people who couldn't get loans from regular banks due to 40% DSR limits could additionally receive policy loans. This caused some households' actual DSR to rise to 60-70%. This phenomenon intensified after introducing 50-year Bogeumjari loans, where long-term repayment reduced monthly burden but significantly increased total repayment amounts, creating structural problems.

  • Second, it contributed to rising real estate prices. Expanding rental-related policy finance in 2018-2019 caused rapid liquidity increases in the rental market, contributing to subsequent rental price rises. Similarly, increasing housing purchase policy loans in 2023 drove up Seoul apartment prices. While policy finance supplied funds to support real demand, it actually created upward pressure on real estate prices. This paradoxically made home buying more difficult, opposite to the policy's intention.

  • Third, moral hazard and policy dependency increased. Policy loan conditions were so favorable that even people capable of getting market loans preferred policy loans. This resulted in middle-class people receiving benefits beyond the original purpose of supporting ordinary people. Some people used tricks like underreporting income or using family names to get policy loans. These phenomena hindered efficient allocation of policy resources and limited opportunities for truly needy groups.

• Side effects of policy finance came from market distortions using regulatory arbitrage, showing how important sophisticated policy design is.

✅ Improvement Plans and Future Policy Directions

• Let's explore improvement plans to minimize side effects of policy finance while achieving original goals.

  • First, applying DSR regulations to policy loans is necessary, but consideration for low-income groups should be maintained. As the Bank of Korea suggested, policy loans should be included in DSR calculations to comprehensively evaluate borrowers' overall repayment capacity. However, relaxed DSR standards or exceptions could be considered for groups needing policy consideration, such as those earning 50% or less of median income, newlyweds, or young people. This would maintain the social function of policy finance while preventing excessive debt increases. Applying differentiated DSR standards by income level would also enable more sophisticated risk management.

  • Second, selection criteria for support targets should be strengthened and support content diversified. Comprehensive selection criteria considering assets, existing debt, and housing situations are needed beyond current income standards. For example, assets that could be inherited from parents or existing real estate ownership should be reviewed together. It's also desirable to approach housing problems by combining various policy tools like expanding rental housing supply, housing cost subsidies, and strengthening tenant protection, not just loans. Expanding monthly rent support programs is particularly needed considering the trend from rental deposits to monthly rent.

  • Third, continuous monitoring and evaluation systems for policy finance effectiveness should be established. Systems are needed to regularly evaluate whether policy loans actually contributed to housing stability and what impacts they had on real estate markets, then reflect this in policies. Since policy finance may have different impacts during rising and falling real estate price periods, flexible operation plans according to market conditions should be prepared. It's also important to track long-term repayment situations and housing mobility patterns of policy finance users to evaluate medium and long-term policy effects.

• Improving policy finance should be achieved through clarifying policy goals and sophisticating methods, not simple regulatory strengthening, and this is only possible through continuous institutional supplementation processes.

4️⃣ In Conclusion

The Bank of Korea's analysis clearly shows the dual nature of housing policy finance. While it somewhat achieved its original purpose of housing stability for real buyers, it also created unexpected side effects of increased household debt and rising real estate prices. This is an instructive case showing that even well-intentioned policies can cause market distortions without sophisticated design.

The positive effects of policy finance are clear. Shortening homeownership periods, improving household debt structure through expanding fixed-rate and installment repayment loans, and improving financial access for vulnerable groups are all meaningful achievements. The relative stability of policy loan users during rapid interest rate increases particularly shows the risk management function of policy finance.

However, side effects from DSR regulation exemption are problems that cannot be overlooked. Excessive debt increases, real estate price upward pressure, and moral hazard are factors threatening policy sustainability. Extreme products like 50-year Bogeumjari loans may increase immediate accessibility but could impose greater long-term burdens, requiring careful approaches.

The direction for future improvement is clear. DSR regulations should be applied to policy loans while maintaining consideration for truly needy groups. Selection criteria for support targets should also be strengthened, and housing problems should be approached using various policy tools beyond loans. Most importantly, policy effects should be continuously monitored and evaluated for flexible operation according to market conditions.

Ultimately, the core of policy finance is sophisticated design of "who, under what conditions, and to what extent" to provide support. While we cannot satisfy everyone, it's time to find a balance point that provides appropriate support to people who really need help while not harming market order. We hope this Bank of Korea analysis becomes an important milestone in finding that balance point.