Korean Housing Finance, Household Debt, and Economic Growth

Governments around the world are confronted with the problem of stoking demand and re-firing growth. The Korean government has relied on making mortgage credit more readily available to boost the housing market and energize the economy. However, this policy exposes Korean households to additional financial risks given their high levels of indebtedness. Moreover, since typical Korean home mortgages feature short-term maturities, floating-rate interest payments, and final balloon payments of principal, such risks are heightened. The Korean mortgage system requires reform, and efforts are needed to reduce the vulnerability of Korean households in coping with possible external shocks, such as sharp interest rate rises and unexpected house price declines. Since housing accounts for almost three quarters of typical Korean household asset portfolios, the housing market, combined with an expected decline in the Korean population, has a significant implication for long-term growth prospects of the Korean economy and the fortunes of the middle class in Korea. The paper assesses public policy options for reform of the mortgage market in Korea with the aim of reducing vulnerabilities for households and for economy more generally. Governments facing similar policy choices as does Korea must balance policies for short-term growth with the longer-run risks involved.