By Kim Tong-hyung
Scholars and analysts called for a paradigm shift in housing policy at a seminar hosted by the state-run Korea Development Institute (KDI) at the Shilla Hotel in Seoul, Tuesday.
They used different wording to present their remedies but the common bottom line was that the country can’t afford to let the property bubble burst and controls should be put in place to ensure that the situation is deflated in a desirable manner.
Senior KDI researcher Cho Man is among critics who believe the government’s grave mistake was extending the environment for cheap borrowing. In his presentation, Cho urged authorities to be more aggressive in suppressing irresponsible lending by banks.
Government policies should be shifted to be more attentive to real, non-speculative demand in the housing market, Cho claimed, and this could be achieved by imposing stricter guidelines on lenders for criteria they consider before offering credit to customers.
Strengthening lending restrictions tied to debt-to-income (DTI) ratios and loan-to-value (LTV) ratios, designed to restrict homebuyers’ borrowing in proportion to their annual income or value of purchased property, will be crucial, he said.
``Although determining proper levels of LTV and DTI regulations require further research, our analyses show that such restrictions contribute to stabilizing consumption and movements in housing price,’’ said Cho, an expert in public policy and management.
The KDI seminar, however, fell short of meaningfully exploring growing arguments that the country would be better off if the government actually lets housing prices fall rather than continuing vain attempts to artificially boost demand.
Such a step would benefit first-time buyers, who authorities say deserve the most support, according to some observers, as despite price skids in the past couple of years, a majority of underpaid workers remain shut out of the market.
With oversupply starting to factor in Seoul and the metropolitan area, home to more than half the country’s population and the center of speculative demand in boom years, it’s become questionable whether the housing market will ever recover from the financial crisis. Owning a house has become economically beneficial to a lesser number of people than ever before.
``In the past decade, the rise in housing prices has exceeded the pace of the economy’s overall growth, which confirms that the real-estate boom was fueled mainly by household debt. Of course, you can’t expect that type of a boost now,’’ said Song Hong-ik, an analyst from Daewoo Investment and Securities, who wasn’t officially part of the seminar.
``The country needs housing prices to stabilize at lower levels at least for the next five years. Homeowners will obviously want prices to keep going up, but an inexorable rise in property prices will come at the cost of productivity. It’s hard to ignore economic difficulties experienced by people between their 20s and 40s.’’
Participants in the KDI seminar also showed interest in whether Korea’s sinking housing market is threatening to take down the traditional ``jeonse’’ rental system with it.
Jeonse, a financial tool unique to Korea, is based on a lump sum deposit tenants pay to their landlords at the start of a rental contract. Tenants have the money returned with no interest when the contract expires, typically after two years, with the imputed interest considered as rent.
Jeonse has dominated the housing rental market since the 1970s and its benefits were clear-cut, at least when people kept borrowing over their heads in blind faith that home prices would rise forever.
Landlords preferred borrowing directly from tenants over absorbing the high interest rates tagged to bank loans, and this provided an easier way for them to finance home purchases. Tenants favored jeonse, which cost them about half the expense of purchasing a home, simply because they were getting their money back after two years.
However, these strengths become irrelevant when the housing market is as toxic as it is now and the cost of borrowing as low as it is now, as interest rates continue to lag behind the pace of consumer price inflation.
According to government figures, the share of families on the jeonse system was 22.4 percent of total households in 2005 and 54.1 percent of rented homes.
However, the share of jeonse households declined to 21.7 percent last year, while households on ``wolse,'' contracts with monthly rent, increased from 17.2 percent to 20.1 percent during the same period, indicating that jeonse’s status as the dominant rental system is about to be disputed.
With rents rising, the difference between the cost of renting a home and buying one is at its smallest in many years, according to market figures.
Sogang University economist Kim Kyung-hwan suggested that step-by-step changes are required in the government’s home rental policies, which have been tailored entirely to the jeonse system.
``Jeonse is preferred by tenants who can mobilize the funds for sizable deposits, but it’s less attractive to the landlord than a monthly contract in the current setting,’’ he said.
``The country faces an important question regarding the future of the jeonse system. Since jeonse emerged naturally from a combination of urban housing shortages, lack of mortgage financing and inadequate financial investment opportunities, it was expected to be phased out and its market share has actually been in decline.
``However, government policy continues to favor jeonse over monthly rents in tax payment and financing. Although this might reflect concerns over an abrupt structural change in the rental market, policies should be made neutral between jeonse and monthly rental options by improving taxation on landlords on jeonse income and allowing deductions for monthly rent paid by tenants.’’