Raising Loan Rates to Rein In Real Estate?

As the government bans or squeezes lending, it is also pushing loan interest rates higher, placing a burden on the economy. The reason it is forcing down lending and raising rates in this way is that it is mindful of the burden created by the failure of its real estate policy. Fear that housing prices might surge again before the presidential election has become the reason for suppressing the lending market.

Loan interest rates are rising day after day. This is because the government has continuously applied pressure in an effort to rein in housing prices. Mortgage rates at banks, which have already exceeded 5% per year, continue to climb. Over the past month alone, COFIX (Cost of Funds Index), the benchmark for floating-rate bank mortgages, jumped by 0.14 percentage points. And it is not just mortgage loans. The same is true of jeonse loans and credit loans.

The government should not try to control housing prices by raising loan interest rates without considering market conditions. It may produce the short-term effect of temporarily freezing the market, but the side effects are far too great for this to be an acceptable prescription. Freezing the market even temporarily is harmful to the economy and will also have negative long-term effects. A small spark like this can spread into a major fire. An attempt to freeze transactions for a time could end up killing the vitality of the economy. That would be like burning down the whole house just to catch a bedbug.

As interest rates at commercial banks rise steeply, an unusual phenomenon has even appeared in some areas such as Seoul: the monthly interest cost on jeonse loans has become more expensive than monthly rent. We have entered a time when it is no longer common sense that paying interest on a jeonse loan is cheaper than living on a monthly rent contract.

As the economic slump has deepened over the past five years, signs of deterioration have emerged across the economy. More and more companies can no longer hold out, are laying off workers, and are giving up their businesses. The government-led increase in loan interest rates adversely affects all classes. Blocking loans to those who need borrowing just to maintain the status quo inflicts serious harm. Forcing greater interest burdens on people already at the margin is harsh. It benefits only the banks.

The group suffering the most direct damage is small business owners. Many of the small business owners harmed by the government’s quarantine guidelines during the prolonged COVID-19 crisis have endured by taking on debt, and even now they are being pushed into situations where they must give up their businesses. With labor costs having risen and sales having fallen because of government regulations, business owners are in a position where they must get through the crisis even by borrowing. Yet in such a situation, they are being denied loans and told to pay even more interest, pushing them toward bankruptcy.

The situation is not good either for individual investors who poured everything they had into asset investments such as stocks and real estate. They are facing blocked access to loans and heavier interest burdens. If asset prices fall, they will be left bearing enormous losses on top of increased debt. The situation for companies is not much different. Companies are struggling under debt burdens due to rising raw material prices and the prolonged effects of COVID-19. For businesses, demand for funds is bound to rise as they seek to secure liquidity and restore investment sentiment amid the extended pandemic. As rigidity in the financial market increases, the burden on companies can only grow.

It is not desirable for the government to intervene, regulate lending, and forcibly raise interest rates. The financial authorities must break free from the government’s political logic. They must move away from prudential regulation of the lending market and refrain from excessive intervention that distorts the market. It is now time to allow the rigid money market to function smoothly again. Enabling those who need loans to secure funding is the most effective disaster-response measure under the extraordinary circumstances of COVID-19. Financial policy should not become the kind that, driven by political logic, takes away people’s umbrellas when it rains.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 부동산 잡겠다고 대출금리를 올리나

Author: Sung-no Choi

Date: 2022-01-25

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24511