The decision to regulate 50-year mortgage loans and special mortgage loans due to the increase in home loans has raised concerns about the mixing of monetary policy with political demands and real estate policy, resulting in a messy situation. The previous government and ruling party introduced long-term mortgage loans in an effort to secure young people’s votes, but this has led to a surge in the “loan to buy a house” market and a missed opportunity for deleveraging. As a result, household loans have increased for the fifth consecutive month.
The need for a 50-year mortgage product was raised two years and six months ago, four months before the launch of a 40-year maturity product by the Korea Housing Finance Corporation in July 2021. The introduction of the 50-year mortgage loan national guarantee system was promoted by the then chairman of the Standing Election Committee of the Democratic Party, Lee Nak-yeon, who apologized for the surge in real estate prices and proposed the system as a solution to help young people and the newly married generation buy homes and pay off debts. However, household debt continued to increase rapidly.
Three months after Yoon Seok-yeol’s government came to power in May last year, the Korea Housing Finance Corporation introduced a 50-year maturity mortgage product. This was seen as a way to ease the monthly repayment burden for young people with low incomes during the early stages of borrowing. It diverged from the Bank of Korea’s approach of raising interest rates to manage household debt.
An anonymous economist explained that the introduction of long-term mortgages was advocated as normal loan regulations, such as the debt service ratio (DSR), made it difficult for young people to buy homes amidst rising housing prices. The pursuit of policies targeting young people by the government led to discussions of the previous government’s actions in the cabinet.
In response to the increase in household loans, the Financial Services Commission decided to limit the basic accounting period for 50-year mortgage loans from banks to 40 years. They also partially restricted the supply of special housing loans, which allow loans of up to 500 million won using homes worth 900 million won or less as collateral, regardless of annual income.
The easing of lending regulations by the financial authorities was aimed at achieving a soft landing in the real estate market. However, concerns about a reversal in real estate prices and project finance (PF) loans of construction companies led the government to tighten loans suddenly. While the fall in house prices across the country stopped, there are now signs of a strong rebound. Apartment prices nationwide rose for two consecutive months in August.
The aim of the “real estate soft landing” policy should not be to stop the fall in house prices, but rather to gradually bring prices back to pre-surge levels. Korea’s housing price-to-income ratio (PIR) is still high compared to major countries, indicating that house prices need to decrease further.
It is important to balance policies for a soft landing in the housing market and stable management of household debts. Household should also be aware of the high interest rate environment and make informed decisions.
According to Jeong Hwa-young, a researcher at the Capital Market Institute, achieving a soft landing in the housing market while managing household debts may pose challenges. It is crucial to find a balanced approach, and households should be prepared for a potentially prolonged period of high interest rates.
50 year maturity agreement aimed at young people’s votes… Regulations on the increase in household debt
A sudden change from ‘buying a house with debt’… “Only those who get the timing right will benefit”
Policies for a soft landing in the housing market and stable management of household debt must be balanced.
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As the financial authorities decide to regulate 50-year mortgage loans and special mortgage loans due to the surge in home loans, there are concerns that monetary policy is being driven by political demands and real estate policy and is becoming a mess.
The previous government and the ruling party argued that long-term mortgage loans should be introduced to attract young people’s votes, and Yoon Seok-yeol’s government introduced this. However, as a result, the ‘loan to buy a house’ market was signaled and the opportunity to ‘deleverage (reduce debt)’ was missed, meaning that household loans increased for the fifth consecutive month.
According to the financial sector on the 17th, the need for a 50-year mortgage product was seriously raised two years and six months ago. This is four months earlier than July 2021, when Korea Housing Finance Corporation launched a 40-year maturity product.
Lee Nak-yeon, then chairman of the Standing Election Committee of the Democratic Party, apologized for the surge in real estate prices on March 31, 2021, about a week before the April 7 by-elections, and said, “It is difficult for young people and the newly married generation to buy their own homes and pay off their debts by receiving secure loans “We will promote the ’50-year mortgage loan national guarantee system’ in order to avoid problems,” he said. At that time, household debt was increasing rapidly, and in April 2021, it increased by 25.4 trillion won compared to the previous month.
Three months after Yoon Seok-yeol’s government came to power in May last year, the Korea Housing Finance Corporation launched a 50-year maturity mortgage product. The idea was, “It can help ease the monthly repayment burden of young people with relatively low incomes during the early stages of borrowing.” It was a different direction from the Bank of Korea, which had begun to seriously manage household debt by successively raising interest rates.
An economist who asked to remain anonymous said, “As housing prices increase, it is difficult for young people to ‘buy their own home’ if loan regulations such as debt service ratio (DSR) are implemented normally, so it was argued that a very long period was needed. -term mortgages should be introduced.” “As the government pursued policies to capture the young people, public officials brought up stories from the previous government in the cabinet,” he said.
On the 14th, the Financial Services Commission held a ‘Home Debt Status Review Meeting’ in conjunction with related ministries and decided to limit the basic accounting period for 50-year mortgage loans from banks to 40 years. This measure was introduced after household loans by all financial institutions increased by 6.2 trillion won in August from the previous month, showing an increase for the fifth month in a row.
In addition, the financial authorities have decided to partially limit the supply of special housing loans which allow loans of up to 500 million won using homes worth 900 million won or less as collateral, regardless of r annual income.
Professor Lee Yun-soo of Sogang University’s Department of Economics said, “As the government lifted real estate regulations one after another this year, it essentially gave a signal to ‘buy a house with borrowed money,’ and then started tightening loans suddenly. .” “It’s like a benefit,” he said.
It seems that another policy goal was behind the easing of the lending regulations by the financial authorities: a soft landing in real estate. The government was not happy with the rapid fall in house prices as concerns grew about a reversal in real estate prices and project finance (PF) loans of construction companies.
As the government lifted lending regulations, the fall in house prices across the country came to an end. But now there are signs of a strong rebound. According to the Korea Real Estate Agency, apartment prices nationwide in August rose 0.23% from the previous month, rising for two consecutive months. The increase in the metropolitan area increased from 0.26% to 0.45%, and regional areas also rose by 0.04%, turning up for the first time in 16 months since April last year (0.03%).
An economist who asked to remain anonymous said, “The aim of the ‘real estate soft landing’ policy should not be to stop the fall in house prices, but to have house prices gradually fall to the level before the price surge.”
According to data from NUMBEO, a national comparison statistics site cited in the monetary and credit policy report released by the Bank of Korea on the 14th, Korea’s housing price-to-income ratio (PIR) reached 26.0 times this year. This means you need to save your average annual household income for 26 years without spending a single penny to buy a house. Given that the median PIR of major countries is 11.9 times, house prices in Korea are still high.
Jeong Hwa-young, a researcher at the Capital Market Institute, said, “A soft landing in the housing market and stable management of household debts can conflict, so policies must be balanced, and households must also be aware that the high interest rate environment. maybe it’s long-winded.”
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