Hello, readers! How are things going on with you? Well, it’s hard to hear fine in today’s depressed economy. Above all, the Korean housing market is showing no sign of picking up soon. People prefer Jeonse which made Jeonse price skyrocketed to almost the same level as buying a house. However, the real estate transaction as well as house price has been decreased, which seem quite ironic in that people choose not to buy a house though the price fell. This is because there’s underlying anxiety among people that house price would fall further. Korean housing market is now in deep freeze. To revive the housing sector, the Financial Services Commission (FSC) and Ministry of Strategy and Finance have decided to ease regulations on the amount of loans for home buyers based on the market value of the house and their income; those regulations are called LTV (Loan-to-Value) and DTI (Debt-to-Income)
Basically, LTV and DTI are both regulations on loan for home buyers. LTV ratio refers to the amount of loans one can borrow based on market value of the house. DTI ratio refers to the amount of loans one can borrow based on income. Both regulations set the upper limit on the amount that people can borrow from banks when buying a house. They were first introduced in 2002 to cool down the real estate overheat but now it’s used for the opposite purpose. Starting from 1 August 2014, LTV and DTI ratio were increased to 70 and 60 percent respectively and applied uniformly irrespective of the city, rural areas, banks and non-banking institutions. With these eased regulations, people can buy a house easier than before because now they don’t have to turn to non-banking institutions that charge them high interest rates.
What is good about LTV and DTI easing? First, it bolsters housing sector. Korean housing market has been brought to a standstill after series of economic downturns. People hesitate to buy a house for multiple reasons but there must be some people who want to buy a house and short of money. LTV and DTI easing would support those in financial need and contribute to real estate market revitalization. Secondly, it helps improve housing debt structure. Korea’s household debt has been growing faster than ever and peaked over 1,000 trillion won, which poses a serious threat to the Korean economy. If I were a person who wants to buy a house and short of money but cannot borrow more from banks due to LTV and DTI regulation, I had to turn to non-banking institutions and borrow at much higher interest rates. This high-interest borrowing exacerbates housing debt, which makes it bigger in absolute volume. LTV and DTI easing would definitely help prevent housing debt from getting bigger in size. However, many of you might have noticed that LTV and DTI easing does not really decrease the household debt itself.
So the critics have pointed out that loosening the loan regulation can only be a temporary measure. It cannot be a fundamental solution for growing household debt. Also, some criticize that falling house price is not a bad signal but rather a normal thing for real estate market seeking to find adequate level. Though there’s different viewpoints and opinions, loan regulation was already eased a week ago and what we can do now is to hope for the best. According to minister Seo Seung Hwan of Land, Infrastructure and Transport, real estate market is already sending good signal in response to LTV and DTI easing. Effects are still remain to be seen.