[EDITORIALS]Intervention a risky idea

The Bank of Korea’s governor, Park Seung, has for the first time expressed an intention to intervene in the real estate market. He said the central bank might raise interest rates, adjust the loan-to-value ratio or even introduce a limit on bank loans for financing real estate purchases.
The context of the remark is that the government’s various real estate policies, including tax increases and the creation of a system to absorb profits from land development, are having little effect.
But the central bank’s basic duty is to stabilize prices and the currency. A move to cool down the real estate market could distort natural capital flow in the financial market and resurrect government-led financing.
It is not yet certain whether Mr. Park’s remark will be followed by action. In the past, lowering the loan-to-value ratio, the ratio of the allowable mortgage loan to the property’s appraised value, has been ineffective. And it would not be easy to raise interest rates with the economy in the cellar. Such a move would add to the burdens on households and small and medium-sized companies. To have a real effect on the real estate market, the key interest rate would have to be raised by at least two percentage points, and that would be a daunting task.
Putting a ceiling on mortgage loans would create an even more serious problem. Such a move should be taken only in the case of a national economic emergency. Not even during the 1997-98 financial crisis was that done. It would cut the real estate market off from cash flow, so it would do the most to take the “bubbles” out of the real estate market.
But the negative consequences would be very serious. It would be no more or less than government-led financing. And even those buying real estate for actual use, as opposed to speculation, would find it hard to get loans. Japan, which made that move in the 1990s, suffered the consequences when the real estate bubble suddenly burst.
The central bank has the authority to intervene in the real estate market, especially now, when low interest rates are considered the main factor behind the recent price surges. But the goal should be a soft landing for the real estate market. The central bank should at least issue a warning before intervening.