In June, the Financial Services Commission announced that the tougher rules on household loans would be applied from September, instead of July -- a sudden schedule change that was feared to send wrong signals to the markets.

South Korea’s top financial regulator intended to guide the real estate project financing market to a soft landing by delaying the implementation of the second phase for the stress debt service ratio, or DSR -- a tool that serves as a ceiling on aggregate lending.

As experts warned, however, people rushed to take out as much in loans as possible before the tighter loan conditions were applied. The result was, unsurprisingly, a sharp increase in household debt.

The data released Tuesday by the Bank of Korea showed that the country’s household credit surged in the second quarter of this year due to a spike in home-backed loans ahead of the planned tightening of lending criteria and high rates.

Outstanding household credit -- credit purchases and loans to households by financial institutions -- stood at 1,896.2 trillion won ($1.419 trillion) at the end of June, up 13.8 trillion won from three months earlier. The increase in the second quarter figure is a turnaround from the second quarter’s 3.1 trillion-won fall.

It should be noted that the rise in household loans came even though borrowing costs remain high. On Thursday the central bank froze its benchmark interest rates at 3.5 percent for the 13th consecutive session amid concerns about snowballing household debts.

In the first 14 days of this month, the household loans extended by the country's top five lenders already reached 4.18 trillion won, in the first 14 days of this month, due mainly to the increase in home-backed loans. Since April, the major banks’ household loans have been expanding by more than 5 trillion won each month.

The total of home-backed loans at the first major banks came in at 562.9 trillion won as of Aug. 14, up 2.2 trillion won from the end of July. Credit loans also climbed by 943 billion during the same period.

Alarmed by the mounting household debt, the FSC unveiled a plan Tuesday to tighten conditions for mortgage loans from next month. FSC chief Kim Byoung-hwan said the regulators would more strictly apply the second-stage DSR to mortgages in Seoul where home prices are rising.

The shifting stance of the financial regulator is inconsistent, if not embarrassing. Under the initial plan, the stress interest rates would be raised from the current 0.38 percent to 0.75 percent. But Tuesday’s announcement means those living in Seoul will be forced to shoulder the stress of 1.2 percent interest rates when taking out home-backed loans.

There are doubts about whether rising household debt would be tamed with financial regulations alone. The housing market had been almost frozen in May 2022 when President Yoon Suk Yeol took office, largely because of the punitive real estate taxes imposed by the previous Moon Jae-in administration. To revitalize the housing market, Yoon loosened regulations on multiple home ownership, lowered related taxes and introduced new home loans with lower interest rates.

The supply shortage is now at the heart of the heated housing market. The government pledged to provide 2.5 million new houses during the five-year term. But just 400,000 new houses were supplied last year, a slower pace than expected.

Another problem is that the government’s pressure on major banks to raise mortgage rates goes squarely against the current trend in which overall interest rates are going down on expectations the central bank may cut rates later this year. Equally problematic is that the government continues to roll out special loan programs with lower rates, targeting specific groups such as the newlyweds and families with new babies.

If the US Federal Reserve Board cuts the key interest rates next month, the Bank of Korea has few other options to follow suit -- a move that will further heat up the housing market. Given the explosive nature of increasing household debt linked to the property market, the government should address the house supply issue and proactively streamline special policy loans.