The measures announced by financial authorities on the 15th to manage loan demand appear to target high-priced housing purchases through “buying homes with debt” and the so-called “moving to a higher-priced area.”
The previously uniformly applied mortgage loan limit of 600 million KRW has been differentiated according to housing price ranges. Loans up to 400 million KRW are allowed for homes priced between 1.5 billion and 2.5 billion KRW, and up to 200 million KRW for homes exceeding 2.5 billion KRW.
The authorities have combined various regulations, such as introducing the debt service ratio (DSR) to jeonse loans, raising the lower limit on stress interest rates, and early implementation of higher risk weights on mortgages, to curb demand.
However, there are concerns in the industry that implementing loan restrictions without strong supply measures could merely serve as a “short-term remedy.”
The core of this enhanced loan demand management is to tighten mortgage limits across regulated areas, especially in the metropolitan area. A new restriction has been added to reduce the mortgage limit the higher the housing price.
This follows the unprecedented “6 billion KRW mortgage limit” set by the June 27 measures, with new thresholds of “4 billion KRW” for homes priced above 1.5 billion to under 2.5 billion KRW and “2 billion KRW” for homes priced above 2.5 billion KRW.
Although applying a 0% Loan to Value ratio (LTV) for homes priced over 1.5 billion KRW was also discussed, past constitutional disputes prompted a search for a compromise solution.
Reducing the limit uniformly from 6 billion to 4 billion KRW was also considered, but excluded due to concerns about overly constraining real demand from consumers seeking to purchase mid to low-priced homes.
Director Shin Jin-chang of the Financial Services Commission’s Financial Policy Bureau explained at a briefing, “The price of high-priced homes is rising first, followed by others, prompting us to set tighter loan limits for expensive homes.”
This measure aims to suppress the demand for ultra-expensive houses to calm rising house prices. It is also expected to curb the demand for moving to more prestigious areas by selling homes in areas like Mapo or Seongdong and obtaining additional loans to move to Gangnam.
Starting this month, the DSR will include the jeonse loans of single-home owners who were previously exempt from loan regulations. This aims to block the excessive supply of the now 200 trillion KRW jeonse loans and the demand facilitated by “gap investments” (purchasing homes with existing jeonse tenants).
Jeonse loans have long been criticized as fueling property price increases but were previously left out of regulation discussions due to a focus on stabilizing low-income housing. This inclusion in the DSR indicates a strong commitment by the authorities.
Measures also include raising the stress interest rate lower limit to 3% for mortgages in the restricted metropolitan areas and advancing the implementation of the raising of the minimum Risk Weight (RW) for bank mortgages from 15% to 20% by three months from the initially scheduled April next year. This employs all available suppression measures from the financial authorities.
In conjunction with regulations significantly bolstered by existing provisions, with LTV dropping from 70% to 40%, loan restrictions were immediately applied by designating all of Seoul and 12 regions in Gyeonggi Province as regulated and land transaction permitted areas.
Market analyses suggest there might be a short-term effect from this loan regulation.
Given the comprehensive demand suppression measures, short-term market transactions may decrease, and the pace of price increases could slow as seen right after the June 27 measures.
However, criticisms have been raised that loan regulations will make it challenging for those with high income but fewer assets, or for young families and newlyweds trying to acquire a home.
Despite the loan regulations, transactions of high-priced homes in districts like the Gangnam 3 area continued to hit record prices, driven by cash-rich investors who remain unaffected by these regulations.
There is concern that reducing the loan limit for expensive houses may funnel demand to homes priced below 1.5 billion KRW, artificially inflating their prices to around 1.5 billion KRW, potentially distorting the market.
There are also fears that the continuous announcement of regulations could trigger a short-term “panic buying” frenzy if a fear of “buy now or never” sets in.