By Kim Eun-jung
SEOUL, Aug. 28 (Yonhap) -- Eased mortgage rules have injected new life into South Korea's long-blunted property market, but how policymakers deal with record household debt will determine how long the effect lasts, banks and market experts say.
The government relaxed loan-to-value (LTV) and debt-to-income (DTI) ratios in August to boost stagnant real estate market activities, a key goal for Finance Minister Choi Kyung-hwan, who has embarked on aggressive stimulus measures to spur economic growth since taking office in July.
Home buyers can now borrow up to 70 percent of their property value and use 60 percent of their income for mortgage payments across the nation. The limit had differed depending on where the home is located and where people apply for loans.
The Bank of Korea (BOK) underpinned the government's efforts by cutting the key interest rate by a quarter percentage point to 2.25 percent in August.
<YNAPHOTO path='C:/YNA/YNACLI~1/Down/Article/AEN20140827004700320_01_i.jpg' id='' title='' caption='South Korea eased mortgage rules in August to help boost the stagnant real estate market. (Yonhap file photo)'/>
The changes in the mortgage rules are the first since the government toughened the borrowing limit to cool down the real estate boom from 2004 to 2007, especially in the Seoul metropolitan areas, as household debt snowballed. The market has not recovered from a slump following the global financial crisis in 2008, however, sapping consumer spending and economic growth.
Although it is still too early to tell, the eased rules seem to have improved consumer sentiment, raising the demand for large homes and old apartments due for reconstruction in southern Seoul that could gain value once they are remodeled.
The average price of Seoul apartments inclined 0.03 percent in August from a month ago, making a turnaround in four months, according to data compiled by Kookmin Bank, the nation's largest mortgage lender.
Old apartments awaiting reconstruction in the affluent southern Seoul area were among the top gainers. Apartment prices in Seocho district increased 0.46 percent and those in Gangnam district rose 0.3 percent, data showed.
"The eased real estate regulations, along with the interest rate cut, are expected to improve consumer sentiment, and more market activities are expected in the fall moving season," Kookmin Bank said in an Aug. 27 release.
A majority of real estate agents forecast that the property market will hold onto the upward trend throughout this year.
Kookmin Bank's housing index based on surveys of 4,200 real estate agents nationwide edged up to 113.1 this month, meaning that there were more respondents who expected a price rise in the next three months.
"The prices offered for Gangnam apartments grew faster under the expanded borrowing limit, along with lower regulations on apartment reconstruction," said Ham Young-jin, a chief researcher at Real Estate 114, a Seoul-based property information provider.
The latest measure also lifted the real estate auction market.
The average auction price for apartments rose to 86.9 percent of appraised prices this month, the highest level since September 2009, when houses were sold at 90 percent, according to Jiji Auction, a real estate information company.
In Seocho district, five homes were sold for more than the appraisal price this month as the price tag surged after the real estate measures, it said.
"It is rare that the apartment auction market gets heated up in the summer vacation season," Ha You-jung, a senior researcher at Jiji Auction, said. "Bidders flocked to the auction market as the property market was revitalized by eased rules on LTV and DTI and apartment reconstruction."
Market experts say the expanded mortgage limit will mostly benefit lower-income and self-employed individuals who have had limited access to bank borrowing.
On the flip side, however, better access to loans can easily worsen the already serious household debt problem, they say.
"Easing regulatory lending limits will boost household credit and will push up the property market in the short to medium term," said Chang Heak-kyu, the Seoul-based financial institution director at global credit appraiser Fitch Ratings. "However, raising LTV and DTI caps has the potential in the longer term to aggravate a household debt ratio and worsen debt-servicing capabilities."
The ratio of household debt to disposable income in Asia's fourth-largest economy stands at 160 percent, much higher than in other advanced economies.
Household credit hit a fresh high of 1.04 quadrillion won (US$1.02 trillion) in the second quarter, with its growth picking up from three months earlier from a visible rise in mortgage lending, the BOK said Tuesday.
The central bank attributed the faster growth to a rise in mortgage lending as some banks increased the portion of their fixed-rate loans.
Despite such concerns, economic policymakers are bent on rejuvenating the domestic economy by encouraging people to borrow more money at a cheaper price.
The financial minister has tried to subdue worries over the debt problem, stressing that enabling debtors to shift from higher-interest consumer borrowing to longer-term mortgages would cut interest payments.
"The transition of debt from non-financial sectors to banks under eased mortgage rules could improve the quality of debt," Choi said during a July 24 policy briefing.
The value of mortgage accounts held by banks reached 343.2 trillion won as of Aug. 22, up 3.9 trillion over end-July, more than doubling the growth from a year ago, the Financial Supervisory Service said. In contrast, the non-financial sector added only 100 billion won to reach 87.4 trillion won during the period.
BOK Gov. Lee Ju-yeol said the key rate cut would have limited impact in the banking sector in the short term should household income growth outpace that of debt.
"The housing market served as the biggest factor behind the growth of household debt in the past," Lee told reporters following a rate setting meeting on Aug. 14. "Considering the current economic situation, shifting demography and housing supply and demand, the size of household debt is not a big concern."
Still, market observers argue that the government should make balancing efforts between the housing market and household debt for long-term financial health.
"The eased lending is expected to speed up the household debt growth in the third quarter," said Lee Jun-hyeop, a researcher at Hyundai Research Institute. "The government needs to control the upward pace of the household debt to keep it in step with the rise of household income."
Fitch Rating's Chang said South Korea may have a "euphoric moment" when cheaper borrowing costs drive up the real estate market, but warned that long-term mortgages pose a higher risk of bad debts and defaulters when the rate goes up depending on future situations.
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