President-elect to ease regulations on real estate

President-elect Yoon Suk-yeol presides over the presidential transition committee's economic policy meeting at the committee's office in Tongui-dong, Jongno District, Seoul, Thursday. Joint Press Corps

Incoming gov't eyes 'bad bank' to aid self-employed

By Nam Hyun-woo

President-elect Yoon Suk-yeol told his transition team to undo the incumbent Moon Jae-in administration's toughened regulations on the real estate market, living up to his election pledge to look for a new way other than punishing owners of multiple homes to boost housing supply to the public.

In recent years, the government has tightened mortgage loan requirements and imposed heavier taxes on owners of multiple homes in an attempt to contain soaring housing prices. But the government's failure to do that contributed the ruling bloc's defeat in the March 9 presidential election.

"The new administration should lower barriers impeding people from possessing their own homes and it should spare no efforts to ease excessive tax burdens," Yoon said during the presidential transition committee's economic policy meeting on Thursday.

He also called on the committee to come up with plans to ease the country's loan-to-value ratio (LTV) requirement, which is one of the main regulations limiting people from obtaining mortgage loans.

LTV compares the size of a mortgage loan to the value of a home a borrower seeks to purchase. Depending on regions, Korea regulates 40 to 60 percent LTV for mortgages, meaning those who want to buy a home worth 1 billion won ($823,700) can get up to 600 million won in mortgage loans.

During his campaign, Yoon pledged to amend the country's LTV regulation, so that a person who does not own a home currently can receive loans amounting to 70 percent of value of the home. For those who are buying their first-ever home, he promised to allow an LTV ratio of 80 percent.

Along with the promise to ease the LTV regulation, the transition committee announced that it plans to ease tax burdens on multiple home owners by suspending the current regulation of imposing heavier real estate transfer taxes on people who own more than one home for at least one year.

By lowering the taxes levied on property sale for such people, the Yoon government seeks to increase the supply of homes in the real estate market and stabilize the country's home prices.

Choi Sang-mok, a member of the presidential transition committee's economic subcommittee, speaks during a press conference at the committee's office in Tongui-dong, Jongno District, Seoul, Thursday. Joint Press Corps

Choi Sang-mok, a member of the presidential transition committee's economic subcommittee, said he will ask the government to suspend heavier real estate transfer taxes on home owners for one year from next month.

"This is aimed at multiple home owners who are subject to heavier gross real estate taxes, to sell their properties before June 1, which is the base date for calculating the gross real estate tax," Choi said during a press conference after the transition committee's economic policy meeting.

"Through this, the committee seeks to increase the number of homes up for sale and therefore stabilize the real estate market."

The Moon administration blamed real estate speculation as the main culprit behind the country's soaring home prices and introduced a series of tough regulations on those who possess more than one home. Since June 1, the government has been levying up to a 75 percent tax when those who own more than one home sells one of them.

Unlike the government's intention, however, the number of homes available on the market plunged, because homeowners refrained from selling their homes while looking for ways to bypass the regulation.

To address this, Yoon pledged to suspend levying heavier transfer taxes on people who owned multiple homes for two years, in order to increase the overall number of homes available on the market.

Choi said the committee will call on the government to suspend the regulation for one year, as it seeks to have more homes to become available on the market promptly.

"Since the country's gross real estate tax is calculated based on the status of June 1, we are informing this preemptively to help them avoid heavier taxes," Choi said. "If the current government refuses to accept this, we will begin implementing it from May 11, a day after the new administration's inauguration."

However, concerns are already growing that the suspension may spur real estate speculation again, as easing real estate regulations may lead to additional home price hikes.

Presidential transition committee head Ahn Cheol-soo enters the committee's office in Tongui-dong, Jongno District, Seoul, Thursday. Joint Press Corps

Also at the meeting, Ahn Cheol-soo, the head of the presidential transition team, proposed to establish "a bad bank" to aid small business owners and the self-employed suffering from financial difficulties due to the government's COVID-19 restrictions.

"The current measures of extending debt maturity for months for small business owners and the self-employed is the same as putting an oxygen mask on a critically ill patient, and this faces its limit," Ahn said. "I ask subcommittees to come up with a plan of setting up a bad bank invested by the government and banks, so they can help debtors to repay their loans at low interest rates over a long period of time."

A bad bank acquires high-risk assets, such as nonperforming loans (NPLs), from banks and other financial institutions at low prices, and either collects the debts or sells them to other financial companies. Through this, original banks can segregate bad assets from good assets, and insolvent debtors can have an opportunity to pay back the money at relatively low interest rates over a long period of time.

According to Ahn, the country's combined amount of NPLs extended to small business owners and the self-employed stood at 133 trillion won ($110 billion) as of January this year, and the combined amount of loans whose maturities were extended or redemption was deferred after April 2020 reached 291 trillion won.

Since the outbreak of the COVID-19 pandemic, many small business owners and the self-employed have suffered financial difficulties, as people shun eating at restaurants amid the government's restriction measures. The idea of a bad bank came up to prevent a large-scale insolvency among those people, as well as helping banks to hedge risks stemming from NPLs.

When a bad bank is set up, it will become the new creditor for the debtors, allowing them to repay at lower interest rates over periods longer than commercial banks. Ahn cited the interest rates for Korea's mortgage loans as a reference. The average interest rate for mortgage loans at the end of February was 3.88 percent, according to the Bank of Korea.

"The interest rates will soar following the U.S. Fed's key rate hike," Ahn said. "Along with faster inflation, soaring interest rates will jack up the overall interest costs. Against this backdrop, extending debt maturities for months may be a stopgap measure, but it will not be the fundamental solution to address the difficulties of small business owners and the self-employed."

This is not the first time that Korea is resorting to a bad bank to overcome its financial crisis.

During the 1997 Asian financial crisis, the Korea Asset Management Corporation and the Financial Services Commission set up a fund aimed at resolving NPLs and collected 111 trillion won worth of soured debt.

In the following administrations, a series of other bad banks were established to resolve snowballing credit card loans in 2002 and contain soaring household loans in 2013.

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