(EDITORIAL from the Korea Herald on Sept. 12)

Housing finance

The trading of apartments has come to a near standstill in Seoul since the
government tightened the spigot on housing finance on Monday. Property brokers
say there are few trades, though many inquire about where housing prices will be
headed in the months ahead.

On Monday, the government extended regulations on housing loans from banks from
Seoul's three wards south of the Han River to Seoul's metropolitan area -
Gyeonggi Province and Incheon as well as the entire capital. But it is too early
to conclude they will dampen housing prices.
In an attempt to forestall speculation in the premium residential districts south
of the Han River, the government has in the past banned a household from
borrowing from banks for the purchase of a home beyond the limit set at 40
percent of its income. Now the debt-to-income restrictions are being applied to
the rest of the capital, Gyeonggi and Incheon, though at higher rates.
The government expects the new regulations will lower home-backed loans 20
percent to 30 percent. The debt-to-income restrictions should help curb apartment
prices that have been rapidly increasing, particularly in the districts south of
the Han.
It is necessary for the government to restrict home-backed loans to prevent
property bubbles forming again. Banks will be exposed to a great risk if property
prices plummet. Falling property prices will have a direct impact on households
as well, with real estate accounting for 80 percent of the total assets held by
an average household.
Moreover, households cannot afford to take on more debt because their income is
not increasing. According to a report from the Bank of Korea, outstanding
household credit amounted to 697.75 trillion won at the end of June, up by a
historic high of 5.7 percent from a year before. On the other hand, the nation's
disposable income grew a mere 0.2 percent to 502.8 trillion won during the first
half of this year, the lowest rate of growth since such statistical figures were
first made publicly available in 1970.
Home-backed loans account for half of all household debt. They stood at 341.4
trillion won at the end of August, with as much as 4.2 trillion won added in the
one month. No wonder the government has extended the debt-to-income restrictions
to Seoul's entire metropolitan area.
Worse still, interest rates are rising. The annual rates applied to new household
loans averaged 5.58 percent in July, up 0.11 percentage point from the previous
year. The debt-payment capacity for households will be further undermined when
the central bank decides to raise its benchmark rate.
Experts believe the central bank, which is keeping the rate at 2 percent, will
increase it late this year or early next year to siphon off excess liquidity from
the market. The Samsung Economic Research Institute is warning that the nation
will be exposed to a household debt crisis if no action is taken. Its impact, the
institute says, will be similar to that of the 2003 credit card crisis.
As experts claim, the debt-to-income restrictions alone may not be able to push
down home prices. They rise when supply fails to meet demand in the housing
market. That is the reason why the government will have to help provide more
homes at low prices than it is planning now. Households will seek to skirt the
debt-to-income restrictions and borrow from non-bank lenders at higher rates if
they are convinced that home prices will keep rising.
The government will have to ease restrictions on building homes and, by doing so,
help supply more homes, particularly in the districts south of the Han River,
where demand is the highest.
(END)