Doubts cast on Park’s house-poor policy

By Kim Tong-hyung

One of Park Geun-hye’s strengths as a politician is that she speaks with an air of sincerity and intelligence. The problem is that, when written down, her comments often make for bizarre reading.

The latest example came Sunday when Park, 60, daughter of former dictator Park Chung-hee and presidential candidate for the ruling Saenuri Party, announced a package of campaign pledges to stem the skid in house prices and help homebuyers and tenants. To everyone, aside from Park’s most faithful supporters, it was obvious that the plans were misguided.

Her ideas can be summarized in three parts. In contracts for ``jeonse’’ rents, homeowners will be given the option of taking out loans and saddling tenants with the interest payments, a proposal aimed at helping people with less available cash to pay rent.

Homeowners stuck in negative equity will be allowed to sell off shares in their properties to public organizations like the Korea Asset Management Corporation (KAMCO) and use the revenue to repay the money they owe to financial companies.

Park also plans to lower the application age for reverse mortgages, an arrangement in which a homeowner borrows against the equity of their home and receives monthly payments from the lender, to provide further protection against the squeeze in living standards after retirement.

The suggestion on reverse mortgages is defensible because they could be argued as financial tools tailored for Korea, which is struggling to cope with a prolonged housing market slump, rising unemployment, spiraling family debt and stagnant incomes. This has resulted in millions of over-50 Koreans marching blindly into retirement poverty.

The first two plans, however, walk a thin line between boldness and absurdity.

Whoever convinced Park that homeowners will be willing to take out loans on behalf of their tenants in this economic climate is probably capable of selling sand in the Sahara. Homeowners who are willing to do this will likely be in desperate financial need themselves and things will only become trickier if they start getting behind on their principle repayments.

Park is obviously attempting to address the problems related to jeonse, a financial system unique to Korea, based on lump sum deposits that tenants pay to landlords at the start of rental contracts. The tenant has the money returned with no interest when the contract expires, typically after two years, with the imputed interest considered as rent.

The benefits of jeonse are clear-cut, at least during times when people think house prices will rise forever. During a property boom, landlords would rather borrow directly from tenants than absorb the high interest rates tagged to bank loans, which provides an easier way for them to finance further home purchases.

And tenants favored jeonse, which cost them about half the expense of purchasing a home, simply because they get their money back after the end of the contract. Obviously, these strengths become irrelevant when the housing market lapses into a coma.

The freefall in house prices in recent years has been accompanied by rocketing rent costs as first-time buyers continue to delay or give-up getting on the property ladder in the face of a sinking property market and economic uncertainty.

Park claims that her plan will allow a large number of workers who had been priced out of the jeonse market to begin renting by eliminating the need of gathering lavish deposits.

She would have made a lot more sense if she had simply promised to promote ``wolse’’ monthly contracts over jeonse instead.

The proportion of monthly contracts has been rising significantly in recent months anyway as cheap borrowing costs and loose monetary policies make landlords less inclined to borrow form tenants and put money in banks when interest rates are so low.

``I don’t’ see how that will work. Homeowners who take out the loans will not leave the money alone and obviously won’t put it in the bank,’’ said Kim Jin-yeong, a real-estate agent in Jeongneung, Seoul.

``Homeowners will invest in the stock market and any other investment opportunity. What happens when they start getting behind on principle payments? Should tenants carry the burden of those costs too? And what happens when a homeowner blows the money on a high-risk investment? Will tenants be asked to chip in then? How will the government ever draw the line on the dos and don’ts?’’

It’s hard to imagine enabling homeowners to sell the shares of the properties to reduce their debt servicing burden working as prescribed. Nobody will be willing to buy shares in a market in which transactions are evaporating unless homeowners sell their properties at dramatically low prices, which they may or may not decide to do.

The idea of KAMCO and other public organizations absorbing tens of millions of homes from distressed owners also raises worries over increasing government debt.