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[Editorial] Mortgage reform

Caution required in boosting home market

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Published : 2014-06-17 20:51
Updated : 2014-06-17 20:51

The debate over housing market regulations has been rekindled as Finance Minister nominee Choi Kyoung-hwan is suggesting the need to ease them as part of efforts to reenergize the sputtering economy.

Upon his nomination on Friday, Choi said he would push for short-term stimulus measures to bolster the weakening pace of economic recovery and ensure that ordinary citizens could benefit from economic growth.

The nominee, a confidant of President Park Geun-hye, spoke of boosting the housing market and drawing up a supplementary budget. He also indicated the need to tolerate the Korean currency’s appreciation against the U.S. dollar.

Choi’s emphasis on short-term stimulus makes sense, given that the economic recovery has been losing momentum following the Sewol ferry disaster in April. The government recently suggested it might have to lower the nation’s growth outlook for this year.

Choi pointed to the strict lending regulations for home buyers, such as the loan-to-value and debt-to-income rules, stressing that they should be softened to reactivate housing transactions.

He likened the housing market to “a person wearing summer clothes in winter.” It is an apt analogy. The current regulations were introduced years ago when the housing market was overheating, that is, when real estate speculation was rampant. But they are still in place years after winter has set in.

“In winter, you must wear warm clothes; otherwise you’ll catch your death of cold,” Choi said. “It is foolish to keep wearing summer clothes in anticipation of the return of summer.”

The LTV and DTI rules set limits on bank loans that prospective home buyers can take out. As such, they are powerful tools in curbing demand for homes. Choi says their shelf life has been overextended. The three-term lawmaker expressed a similar view in April, when he was the floor leader of the ruling Saenuri Party.

Since early last year, the government has sought to inject vigor into the housing market. It has unveiled a set of stimulus packages, but with limited effects. One reason cited by some experts is that the LTV and DTI rules had been left intact.

Choi seems to be convinced that the most effective way to pull the housing market out of the doldrums is softening the mortgage regulations. But easing them entails the risk of increasing household debt, which has already surpassed 1,000 trillion won and is still growing.

As mortgages account for about half of household debt, eased lending rules could trigger a rapid debt expansion, posing risks to the nation’s financial system. For this reason, financial regulators have been strongly opposed to any attempt to ease the regulations.

Choi seems to think that these concerns have been exaggerated. Some experts argue in his support that eased mortgage regulations could reduce household debt by enabling home owners to refinance their high-cost loans from nonbanking financial companies with low-cost mortgages from banks.

The power to adjust the mortgage regulations is in the hands of the Financial Services Commission. But Choi will be able to have the commission change its stance on them as he will double as the deputy prime minister of economic affairs, with the power to coordinate differences among economic ministries.

The current mortgage rules seem to have some room for adjustment, although it is not certain whether eased regulations would boost the housing market. Before making any decision, Choi is strongly advised to carefully study his options and listen to diverse standpoints.

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