Reinstating debt-to-income caps may further weaken property market
Korea’s plans to reinstate mortgage lending limits that were temporarily scrapped in August to spur property transactions may lead to a further decline in the real estate market.
Korean banks will resume restrictions on the amount of loans homebuyers can get as a proportion of their annual income starting in April, the government said Tuesday. It will also halve property transaction taxes until the end of this year to help spur sales.
The government is attempting to rein in household debt by restoring mortgage limits and offsetting the effects on property sales with the lower taxes. Apartment prices dropped 2.2 percent last year, the first decline in six years, according to data from Kookmin Bank.
“The revival of mortgage loan restrictions will dampen sentiment for potential home buyers,” said Cho Min-yi, head of research at SpeedBank, a housing consulting company in Seoul. “Other measures like lower taxes are just not enough to spur demand for purchases.”
Under the reinstated caps, banks can extend as much as 50 percent of a borrower’s annual income for purchases of homes in Seoul and 60 percent for areas outside the capital. Bank lending to households rose to a record 431.7 trillion won ($385 billion) in February as people took out more loans to buy houses, the Bank of Korea said on March 9.
“We can never underestimate the potentially explosive nature of the household debt issue,” Finance Minister Yoon Jeung-hyun told a news conference.
He was speaking on behalf of the three government ministries and a financial regulatory agency involved in the measures.
To prevent the market from cooling too quickly from the tougher lending rules, the government said it would halve home purchase taxes to between 1 percent and 2 percent for the rest of this year, depending on the purchase value, from between 2 percent and 4 percent now.
The government will also extend the waiver on debt-to-income limits for first-time homebuyers with lower incomes.
Analysts said the measures here would not likely give a big boost to the housing market as demand for new homes has slowed, partly on the back of concerns the country’s population will start declining a few years from now.
“It will likely have more to do with people’s sentiment than having a big boost to the housing market,” said Suktae Oh, economist at Standard Chartered in Seoul.
Lee Chang-keun, an analyst at Hana Daetoo Securities Co. said the government announcement would at least help boost the market for new homes.
“Hopefully, higher new home prices will also lead to gains in prices of existing homes,” he said.
Korean housing prices have been gradually recovering since late last year in line with the recovering economy, but rising interest rates and a population peak in a few years has hit sentiment.
Past shifts in property policy and a tradition of using real estate as a key investment have been blamed for the sharp buildup in household debt, which by one measure is at the highest among OECD member countries.
Political analyst Yu Chang-seon said the move showed the government’s political sensitivity to the household debt situation.
“The Grand National Party could very well struggle even more,” Yu said, referring to the late April elections.
The measures came as President Lee Myung-bak’s ruling Grand National Party readies for by-elections in several provinces next month at a time when his approval rating is falling thanks to rising inflation.
The government has few tools to boost the property market thanks to heavy household debt due to slower growth in disposable incomes, a major economic risk for Asia’s fourth-largest economy.
