Loan-to-value ratios tightened for real estate

Loan-to-value (LTV) ratios on real estate purchases are to be tightened this month, and jeonse guarantees are to be limited, as the government continues to fight what it describes as speculation in the market.

At the same time, the authorities said they would suspend the implementation of a maximum cap on preconstruction apartment sale prices, announced in August, until April next year.

“Under the agenda of protecting real buyers and cutting off speculative investors, we have proceeded with persistent policies of stabilizing the housing market, including expanding the housing supply in the greater Seoul area by 300,000 units as well as the Aug. 2 [2017] and the Sept. 13 [2018] measures,” Vice Finance Minister Kim Yong-beom said during a joint government press conference, which also included the Land Ministry and the Financial Services Commission.

“As a result, the nationwide housing value, including the overheated Seoul area, since Sept. 13 has stabilized overall,” he added. “But recently, we have detected an anomaly of overheating in the market in Seoul centered on four districts in the Gangnam area.”

Starting Oct. 14, for all investors, whether they are an individual, a housing rental business or a corporation, a 40-percent LTV ratio will be applied in areas that are designated as speculative or overheated. The government has designated a total of 31 areas as overheated, including all 25 districts in Seoul, several areas in Gyeonggi, including Bundang, Seongnam and Gwacheon, and the administrative city of Sejong.

A higher LTV ratio of 60 percent applies to areas that are considered less speculative but still overheated. The government designates areas as being in this category by comparing property price increases to the overall consumer price index (CPI) or by examining the demand for apartments.

Under the current regulation, it is impossible for a person with a single apartment in Seoul or other designated area to get a mortgage, as the LTV has been set at zero for them.

But, by using a corporation, they could borrow up to 80 percent of the property value.

This loophole has allowed many real estate owners to purchase additional apartments more easily and is seen as one of the drivers pushing up property prices.

The government said it is also regulating jeonse, or long-term lease apartment deposits, that have been used for so-called gap investments. Gap investments allow a buyer to purchase an apartment with little investment as they use the jeonse for capital.

The government will limit government guarantees on jeonse loans to couples with a combined annual income exceeding 100 million won ($83,000) as well as for those owning an apartment with a market value of over 900 million won.

The government, however, decided to suspend the implementation of the cap on preconstruction sales prices for the next six months on ongoing projects.

“There are no changes to the basic structure of expanding the limits on preconstruction sales prices on apartment projects, including reconstructions,” said Vice Land Minister Park Sun-ho.

“However, we have considered the inconvenience that many would face in reality if we immediately apply the maximum limits on those that have already received the approval, including those already in the process of demolishing buildings or relocating previous residents.”

According to the government, 68,000 apartment units and 61 projects have been approved but have not yet reached the sales stage.

The government came up with its latest housing plan after housing prices in Seoul, particularly the four districts in Gangnam where there’s a high demand, continued to rise despite government efforts.

Many experts have pointed to the Land Minister Kim Hyun-mee’s decision in August to cap preconstruction apartment prices as the primary reason for the rising apartment prices.

Experts at the time said the move would only drive prices up, as many construction companies will be reluctant to go ahead with apartment construction projects, particularly those seeking reconstruction approval. The shortage of supply will only increase the demand for apartments, particularly in Gangnam.

According to the Land Ministry, apartment prices in Seoul have been rising for the last 13 consecutive weeks since July.

Although Land Minister Kim officially announced the government’s decision to apply a maximum limit on preconstruction sales in August, she first raised the possibility during a National Assembly hearing in July.

In the final week of September, apartment prices rose 0.06 percent, which is double the 0.03 percent increase seen in the previous week. The four districts in Gangnam rose at a faster rate, increasing 0.09 percent compared to the previous week.

An 82.61-square-meter (889-square-foot) apartment in Jamsil Jugong 5 Danji in Songpa, which is one of the most anticipated reconstruction apartment projects, on Sept. 17 was sold for 2.2 billion won, breaking the previous record set in June, when an apartment of the same size was sold at 2 billion won.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]