A growing number of Korean homeowners are wealthy on paper, but poor in practice. Burdened by mortgage repayments, these so-called “house poor,” often living in upscale neighborhoods, struggle to finance their day-to-day spending. While there is no precise definition of what constitutes house poor, the Financial Services Commission and the Korea Institute of Finance estimated in October that there were some 570,000 potential loan defaulters, homeowners who spend more than 60 percent of their income servicing mortgage debt, across the nation. The same report put the number of “high risk” house poor, those unable to pay off their debt even by selling all their assets, at over 101,000.

The roots of the current problem go back to the local real estate boom of 2005-2007, according to Man Cho, a professor at Korea Development Institute School of Public Policy and Management.

“At the time, the global interest rate was very low,” said Cho. “Also there was a lot of capital inflow to Korea and other Asian countries, probably due to the fear of real estate bust in the U.S. and European counties. So there was ample liquidity in the Asia region.”

President-elect’s plans

This was followed by a big rise in self-employment and borrowing from high interest-charging financial institutions following the subsequent global financial crisis.

“Many households had early retirement in their late 40s and 50s so many of them opened up a small business,” said Cho. “Then they used their home as collateral to borrow money. After the financial crisis we had an increasing volume of loans from second-tier financial institutions, not the main commercial banks but the saving banks and credit unions and all that. And many of them are paying very high interest, like over 20 percent.”

President-elect Park Geun-hye has made tackling the house poor issue one of her policy priorities, outlining a number of measures to alleviate their debt burden. Among them is a proposal to allow property-owners sell shares of their property to the Korea Asset Management Corporation, an agency set up in the amidst of the 1997-98 Asian Financial Crisis to take over non-performing loans. Homeowners would then be able to use the proceeds of the shares in their property to finance their debts.

“It could work depending on how many people decide to take advantage of this. It might have an impact on the market,” said Kim Kyung-hwan, an economics professor at Sogang University. “But I tend to believe that it is not clear at this point whether government should pitch in money, public funds, to help these house poor. I think the first thing to do is to narrow down the target of policy if government wants to intervene at all.”

There remains a fairness issue to be considered with using public funds to support people who, by some measures, are quite well-off, Kim added.

“There is an equity issue. So-called house poor are relatively better off than those who don’t own houses at all or have a hard time making their rental payments. So in terms of priority of government intervention, the government really needs to convince the public that these people deserve support with public money.”

Blame

Park has also proposed allowing homeowners drawing up “jeonse” contracts to take out loans on a tenant’s behalf, with the tenant paying the interest, as well as lowering the age eligibility for reverse mortgages. Government efforts to address the problem and issues in the housing market generally, however, are nothing new. Whereas the Lee Myung-bak government has tried to boost the sagging real estate market, the previous Roh Moo-hyun administration made extensive efforts to cool rising house prices.

Cho assigns blame to both governments for the current situation.

“(Roh Moo-hyun administration) could have done better in terms of managing the real estate boom if we try to find an area of improvement for that government, whereas the current government, I personally think, could have done more in terms of prudential regulation of the second of financial institutions, in terms of expanding their lending volume to these more vulnerable households.”

The Financial Supervisory Service has in recent months sought to increase the proportion of fixed-rate loans and implement pre-workout programs to allow borrowers to pay back loans over longer periods of time.

“Considering banks’ ability to absorb losses, household debt level is still bearable,” said Han Myung-jin, a spokeswoman for the FSS.

“However, delinquency may increase in the future if a slowdown in the real estate market continues. The FSS encouraged banks to extend the maturity of loans and allow installment debt payments in early August. We will strengthen monitoring of household debt risk and conduct on-site inspections, while easing the debt-service burden on low income families.”

Kim added that the agency was planning to set up a taskforce on household debt.

Perceptions

Some observers, however, believe that the housing market is largely beyond external control. Despite perceptions, governments actually have limited ability to affect real estate markets, argued Sogang University’s Kim.

“I don’t think the government can either boost or stabilize house prices in a manner that the general public believes,” he said. “Government has only limited power. You might recall the past Roh Moo-hyun administration government did everything they could think of to control, contain house price appreciation, (it) never succeeded. And the Lee government tried everything they could think of to boost the housing market, it didn’t work.”

Cho, however, does see joint government and private sector action to modify loan terms as one feasible remedy.

“The government, as well as major private financial institutions, can think of how to convert some of those high-indebted households to the first-tier financial institutions, probably by modifying their loan terms,” said Cho. “And I think there should be some cost sharing among borrowers, the government, as well as the financial institutions, in converting those at-risk loans into safer, more affordable loans.”

Capitalism, of course, isn’t just about making sure the numbers add up. In the vagaries of the market, perception can matter as much as reality. In the view of Sogang University’s Kim, the house poor problem is largely one of a lack of confidence.

“The terms of finance are very favorable even if you have a good credit score ― this is really great in terms of getting a mortgage,” he said. “But people just don’t move. They would rather decide to stay as renters. Many of the renters in the Gangnam area could easily buy a house elsewhere if they used the deposit they have tied up in their current ‘jeonse.’”

Part of this pessimism is explained by the relative job and income insecurity felt by many homeowners in recent years.

“Macro economic prospects are not good, so people cannot really make plans on a long term basis, given uncertainty about their income and employment prospects,” he said.

But, he added, a misplaced belief that house prices will continue to fall indefinitely due to the aging population is also to blame.

“We have 15-20 years before this will really take effect,” he said. “And if you look at other countries in the region ― China, if you look at Hong Kong, Taiwan and Singapore ― in all these countries aging is proceeding quite rapidly. They have about the same level of aging as Korea but their housing markets have been very strong even after the global financial crisis.”

By John Power (john.power@heraldcorp.com)

Readers’ VOICE

Food safety …

Once an issue becomes public, laws usually follow quickly, but more could be done, for instance against abuse of pesticides. Labels could help consumers tell genuine slow food or organic food from marketing gimmicks, but the process of establishing labels itself should be well monitored ― see how, in the EU, industrial lobbies managed to fit “bio” labels to their own standards.

― Stephane Mot, Seoul, via Facebook

The Food Safety System, or lack of it in real terms, cannot work. Socially, Korea has much to learn from developed countries and may be many years behind in many ways.

Food safety is not just a word, something to claim is being done. It is a very serious matter, so serious that it should be one of the top data-gathering topics.

What you eat is what you are going to be in the future. Lead-laden cabbage from wherever that somehow makes its way to a kimchi pot will tax you in the end through cancers and disease. You will pay with Korean human currency, because the lack of control dominates the day.

The sustenance today will be the accumulated toxins of years to come. We sell cup-noodles by the millions knowing of all the carcinoma-causing substances they contain. The main cause of death in Korea is cancer, and specifically, stomach and liver and related cancers.

Show me control, a visible food safety system, statistics on numbers treated for food poisoning, upset tummies. They are non-existent, I am sure. Yet, people are our most important strategic asset. People, at the top of the feeding chain, should surely be properly fed or at least be protected in terms of what they eat. It is a strategic survival issue. Times have changed. People can no longer eat from the trash of a military unit or standards close to it.

Just maybe, the following will help direct our thinking:

1. There should be a department of Food Hygiene and a separate department for Food Safety.

2. The first should control the food providers big and small with an iron fist, enforcing a “no mercy” policy of unannounced inspections and immediate closures until the problems are sorted out. The public is too exposed to the mercy of unscrupulous cafes hawkers vendors and mom ‘n pop shops.

3. The other department has two legs; one controlling quality of all imported food for quality and compliance. The other to have a tight grip on all pre-prepared and pre-packed foods like bottled water, frozen “mandu” and dried foods like noodles. They would follow the same no mercy policy.

4. These departments should be responsible for statistics and data gathering. For example, each case of food poisoning reported or even suspected should be reported to a national database like we are to have for HIV&AIDS, cancer, hepatitis, mad cow disease etc.

Korea should convince the citizens of this country and the guests living in her belly that they are serious in becoming a developed country. A food safety system that is visible, tangible and enforced will go a long way to strategically position this nation on its way to greatness.

― PJ Venter, Seoul