Financial authorities are creating confusion in the market with conflicting policies on household debt management and interest rate reductions. The situation has been further intensified by the removal of the land transaction permit system in Gangnam, Seoul, leading to a surge in loan demand. The financial authorities assessed that while the flow shows a trend close to stagnation, it is not alarming, although concerns have been raised that a continued decrease in loan rates could result in an increase in household loans.
According to the 'Household loan trends for February 2025' released by the Financial Services Commission on the 13th, household loans across the financial sector increased by a total of 4.3 trillion won last month. After decreasing for the first time in 10 months in January, the trend has reversed and increased again within a month. The rise in household loans was driven by mortgage loans. While other loans such as credit loans decreased by 600 billion won, mortgage loans increased by 5 trillion won.
While the financial authorities explained that the demand for moving during the new school term had an impact, there are interpretations that the outcome is due to a mismatch between policies, as new loan approvals by banks began at the start of the year, coinciding with the removal of the land transaction permit system in Seoul. The financial authorities are publicly promoting household debt management, but they are also simultaneously pressuring banks to reduce their household loan rates in line with the base rate cut. Consequently, as the barriers to bank loans have decreased and the regulations of the land transaction permit system in Seoul have been eased, this has stimulated loan demand, and the suppressed loan demand from the end of last year has manifested in an 'open run' on mortgage loans at the beginning of the year.
The removal of the land transaction permit system is affecting not only the apartment prices in the Gangnam area but also the sentiment in the real estate market. According to the Korea Real Estate Agency, this week, the sales price of apartments in Seoul rose by 0.2%, with the increase in the sales price particularly noticeable in the three districts of Gangnam. Songpa District skyrocketed by 0.72%, marking the largest increase in 7 years and 1 month, while Gangnam District saw a 0.69% increase and Seocho District increased by 0.62%.
Thanks to this upward trend, buying sentiment is also spreading to other areas of Seoul, such as Mapo District and Seongdong District. From January 1 to December 12 of this year, the number of transactions for apartments worth over 2 billion won in the Mapo, Yongsan, and Seongdong Districts totaled 167, more than double the 81 transactions during the same period last year. This signal of eased regulations has led to increased buying sentiment, rising housing prices, and a rise in loans.
Furthermore, since last year’s end, the income criteria for the special loans for newborns have been raised from 130 million won to 200 million won for dual-income households, leading to an increasing trend in loan demand. According to the office of Democratic Party lawmaker Lee Yeon-hee, from the launch of the newborn loan on January 29 last year to January 30 this year, a total of 13.2458 trillion won in loan applications were submitted. This averages out to 1 trillion won in loans issued each month.
As the new loan amounts are executed 2 to 3 months after the housing transaction date, there is a high likelihood that household loans will continue to increase in the future. The removal of the land transaction permit system could spread the buying sentiment towards newly constructed and large-scale complexes in the outskirts of Seoul. Since September last year, the monthly average transaction volume of apartments in Seoul has been around 3,000, but as of the 12th, last month’s transaction volume reached 4,350, which is a 36% increase compared to 3,194 in January, even though the reporting period has not yet concluded.
However, the financial authorities maintain that the increase in household loans is still at a manageable level. The Financial Services Commission has stated its policy to manage the growth rate of household debt within the expected current growth rate of 3.8% this year, arguing that it has not deviated significantly from the target level.
Lee Bok-hyun, the head of the Financial Supervisory Service, remarked regarding the increase in household loans that 'this is not a situation to worry about,' noting that 'the trend in March is showing a flow close to stagnation, so it is not at a scale that would trigger a red alert.'