South Korea appears to be set to introduce revised regulations on mortgage loans to allow prospective homebuyers to borrow more in a move to revive the slumping housing market, but questions linger on the validity of the solution.

The Ministry of Strategy and Finance, under the new finance chief Choi Kyung-hwan, is preparing to raise the loan-to-value ratio to 70 percent from the current 50 percent for most home trade in the country.

Choi has repeatedly said the revised loan rules would help many more Koreans ― even those who might not otherwise be able to afford one ― to get on to the housing ladder with deposits of as little as 30 percent of the property’s value. Home buyers, for instance, will be able to borrow up to 350 million won ($339,000) when buying an apartment worth 500 million won after the revised rule takes effect.

Mixed opinions

Market analysts seemed to have mixed opinions about easing regulatory lending limits, with some doubting whether the measure would actually encourage more people to purchase homes.

Park Won-gap, a real estate researcher at KB Kookmin Bank, was skeptical of the revised mortgage lending having more than a limited effect on the market.

“(LTV) deregulation may temporarily push up property sales, but it can’t guarantee a prolonged effect due to the lukewarm expectations that people have toward housing prices,” he said.

“Unless home prices rise drastically, people are likely to remain reluctant to make purchases on mortgage because consumers currently believe the value of the house (or apartment) they buy will eventually fall, as it has for the past several years,” a local real estate agent said.

Analysts say the continuous decline in housing prices is discouraging people from selling, thereby limiting the supply of available homes and contributing to slower home sales.

Despite Choi’s remarks on the housing market recovery, the pace of the fall in home sales continued for the second straight month in June. According to data from the Ministry of Land, Infrastructure and Transport, the number of home transactions stood at 73,108 last month, down 43.7 percent from a year earlier.

In the meantime, the average ratio of jeonse ― Korea’s unique rental system under which tenants put up a lump-sum deposit for rent ― to the sales prices of apartments nationwide stood at 68.8 percent last month, hitting a record high since the data first began to be collected in 2002, according to KB Kookmin Bank. This was because more people are opting to put up jeonse, rather than buy homes. 


Affordability worsening

KB data also showed that the average price of the top 20 percent of homes fell 7 percent over the last five years, while the bottom 20 percent of cheaper homes jumped nearly 57 percent, indicating worsening house and apartment affordability for those with lower incomes.

Analysts are also wary of possible negative effects from the rising household debt.

Rating agency Fitch said easing regulatory lending limits will boost household credit and act as a positive catalyst for the property market in the short to medium term.

However, raising the LTV ratio has the potential in the longer term to aggravate a household debt ratio which is already high, and worsen debt-servicing capabilities.

The new finance chief, who kicked off his term Wednesday, is expected to announce a package of stimulus measures for the country’s economy, including revised LTV rules before the end of this month.

But the ministry is reportedly considering maintaining the debt-to-income ratio for mortgage funds at current levels in order to slow down the increasing speed of rising household debt, which surpassed 1,000 trillion won at the end of 2013.

By Oh Kyu-wook (596story@heraldcorp.com)