South Korea’s household loans surged at an embarrassing pace last week, ringing alarm bells for financial authorities over local home buyers rushing to take out mortgage loans from banks, often beyond their repayment capacity, in a bid to ride a recovery period in the housing market.

The combined household loans from the country's five major banks -- KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NongHyup Bank -- climbed by around 2.2 trillion won ($1.6 billion) in the first four days of July, data showed.

The total household loan balance of the five major banks amounted to 710.8 trillion won as of last Thursday, up 2.18 trillion won from 708.6 trillion won at the end of June.

There are two possible culprits for the heady growth in household loans. First, more people apply for loans from banks, betting on the boom of the housing market, which has begun to show signs of a recovery. Second, more investors take out loans to invest in the stock market in hopes of a bigger return, especially when the Bank of Korea slashes the benchmark interest rate toward the end of the year.

Thanks to the upbeat sentiment, mortgage loans rose by 838.7 billion won to reach 553 trillion won, while credit loans surged by 1.09 trillion won to stand at 103.9 trillion won in the four days last week.

One of the critical issues is that housing transactions have been on the rise. The number of transactions was estimated at around 6,000 in June, compared with 5,182 in May and 4,840 in April. The June figure marked the fourth consecutive monthly increase. The number of transactions in June is similar to the level three years ago when the housing market was overheating.

The average price of apartments in Seoul has risen for 15 straight weeks since late March, sending the average transaction price to about 1.2 billion won in May.

Lower mortgage loan rates, fears about the shortfall in housing supply and the rise in prices of two-year “jeonse” leases are largely attributed to the recent increase in demand among home buyers.

Experts also blame the Yoon Suk Yeol administration for the wobbly housing market and overconfidence of home buyers who are willing to take out loans from banks. The government often talked about the gravity of ballooning household debt, but allowed banks to offer a range of special loans with lower interest rates customized for certain groups such as families with a newborn child. Banks have processed about 23,000 special loan applications linked to a newborn child in the past five months, resulting in an increase of 6 trillion won in the loan category alone.

In addition, the Financial Services Commission delayed the planned implementation of the second phase for floating rate stress debt service ratio, tougher rules on household loans, from July to September. Some of the home buyers are said to have rushed to apply for loans at banks before the second phase DSR with more stringent loan standards will be applied.

The recent government steps seem to have sent misleading signals to the public and the market, leading to a spike in household loans. The government has to properly manage the level of already-high household loans since it can backfire in a way that undercuts a nascent recovery in the economy saddled with poor DSR figures. According to data from the Bank for International Settlements, Korea’s DSR for the household sector was 14.2 percent in 2023, ranking fourth among the 17 major economies.

As some experts suggest, the government has to tighten loan rules and consider applying the second phase DSR earlier than September to prevent household debt and the housing market from spinning out of control.