Homebuyers Back as Korea Seeks to Awaken Idle Market: Mortgages

Aug 25, 2014 12:30 am ET

Aug. 25 (Bloomberg) -- After moving six times in 10 years, Choi Youn Ho, a 46-year-old chemical researcher, said he is hopeful easier mortgage rules will finally allow him to buy a home on the outskirts of Seoul for his family of four.

“I’m sick and tired of finding a new home, packing and moving every two years, whenever the lease contract expires,” said Choi, who works at a chemical trading firm and had a 24 percent increase in rent in May when he moved into a new three- bedroom apartment. “I can get a bigger loan now; it may be the time to finally buy a home rather than swallowing this crazy rent rise.”

South Korea loosened banks’ mortgage restrictions this month as Finance Minister Choi Kyung Hwan, appointed in July, seeks to revive a stagnant property market in Asia’s fourth- largest economy, boost growth and stimulate domestic consumption. A nationwide weekly apartment purchase price index hit a six-year high on Aug. 18, according to Kookmin Bank data.

The new polices are “stronger than people had expected and are thawing the market,” said Shim Gyo Un, a real estate department professor at Konkuk University in Seoul. “People who have been burdened by surging rents now are turning to buying as they have easier access to mortgages and they feel bank loans are cheaper than rents.”

The government increased the loan limit for homebuyers to 70 percent of a property’s value from as low as 50 percent, starting this month. Borrowers will be allowed to use 60 percent of their income for mortgage payments, up from 50 percent for homes in Seoul, which had the most stringent lending rules.

Mortgage loan applications received at Standard Chartered Plc’s Korean unit almost tripled to 927.5 billion won ($910 million) this month through Aug. 22 compared with the total in July, the bank said in an e-mailed statement today. The easing in the loan-to-value and debt-to-income limits as well as the Bank of Korea’s interest rate cut contributed for the rise, the bank said.

Falling Prices

South Korea has avoided the surge in home prices seen in Hong Kong and Singapore in the last five years as the government tackled record household debt levels with measures including capping banks’ lending to households and promoting fixed-rate mortgages.

Apartment prices in the capital Seoul fell for four straight years through 2013 after almost tripling in the previous 11 years, according to an index compiled by Kookmin Bank, the country’s largest mortgage lender. Prices for Seoul and the surrounding metropolitan area, where almost half of the country’s 50 million people reside, have been stagnant since they peaked in 2008 after the previous decade of boom elevated household debt.

Easing mortgage curbs to boost the property market is at the center of Finance Minister Choi’s policies to stimulate growth -- dubbed Choinomics after Japan’s Abenomics, which refers to reflationary monetary and fiscal policies to revive economic expansion.

Gangnam Style

The Bank of Korea cut the benchmark interest rate for the first time in more than a year on Aug. 14, to 2.25 percent.

The average new mortgage loan rate was 3.58 percent in June, the lowest level since the Bank of Korea began tracking the rate in September 2001.

The economy expanded at the weakest pace in more than a year last quarter and the central bank last month reduced its growth forecast for this year to 3.8 percent.

The nationwide apartment purchase price index was 101.9 in the week of Aug. 18, the highest level since April 2008, according to the data from Kookmin Bank.

Prices in Seoul’s affluent Gangnam area -- immortalized in Psy’s hit song Gangnam Style -- rose at the strongest pace in more than five months in the week to Aug. 18, the data show.

Same Fundamentals

Some are skeptical of the measures’ success.

Choi’s determination to “normalize” the housing market and boost sentiment may exacerbate South Korea’s household debt without lifting home prices, said Lim Hyun Mook, head of real estate at Shinhan Bank, the third-largest lender by assets.

“Regardless of the mortgage rule changes, the fundamentals of the market haven’t changed,” Lim said. “People don’t buy homes because they aren’t certain about the future price gains and their income flow. It’s not because they can’t borrow enough money. I expect the impact would be short-lived just like the government’s previous measures.”

A 10 percent drop in home prices would more than double the interest-payment burden for those whose mortgages exceed 60 percent of the home value, the Korea Development Institute said in a report published in June, based on 2012 data.

The household debt, including loans and goods purchased on credit, stood at a record 1,024.8 trillion won at the end of March, including 422 trillion won in mortgages extended by banks and other depository institutions, according to the latest data from the Bank of Korea.

Debt Risk

“The loosened mortgage rules should be reversed,” said Jun Sung In, an economics professor at Hongik University, adding that debt risk needs to be contained. “Given that an interest rate cut followed the easing of the rules, loans on credit are likely to increase and add to the household debt risk.”

The Financial Services Commission in February said that it aims to reduce the country’s household debt-to-disposable-income ratio by 5 percentage points by 2017. South Korea’s 163.8 percent ratio is higher than that of the U.S., Canada and the average of member countries of the Organization for Economic Cooperation and Development, the regulator said.

Finance Minister Choi’s measures will boost the housing market in the short term, especially as interest rates fall, said Kim Kyung Soo, an economics professor at Seoul-based Sungkyunkwan University.

“Loosened loan controls mean more than just more transactions; it means more business,” Kim said. That comes at the expense of more household debt, he said.

Buy, Rent

Prices for properties sold at auction are rising. The average auction price was about 87 percent of what properties were valued at in July, the highest since at least 2008, according to Real Estate Taein, an online auction information provider.

“It’s an upbeat sign that demand from potential homebuyers is rising, and that they are starting to take action,” said Jung Dae Hong, an analyst at Seoul-based Taein, adding that auction market prices are often a leading indicator of the housing market.

Choi, the chemical researcher, has his sights set on a three-bedroom apartment of about 84 square meters (904 square feet), overlooking the Han River in Hanam, a satellite city in the southeast of Seoul. The new units, which will start selling in September, cost about 260 million won. His new rent deposit was 210 million won.

The apartment purchase price index for the Seoul metropolitan area fell 5.9 percent over the five years through July in contrast to the 48 percent jump in an index for rents, according to Kookmin Bank data.

“I used to think owning a home on debt is an absurd idea, especially when I don’t believe home prices will rise,” Choi said. “But look at this rental market, I may have to borrow money anyway to pay for the lease rise. I’d rather be a debtor with a house rather than be a tenant on debt.”