Time to ease the DTI capWith prices in the property market plummeting, the signs are ominous. Some have even begun to voice concerns about a real estate bubble like the one that started ballooning in Japan in the late 1980s. It is time for the authorities to devise measures to prop up the real estate market as property values decline.
The government is expected to release its plan for the real estate market next week. In anticipation of that announcement, Ko Heung-kil, the ruling Grand National Party’s policy committee head, has proposed that policy makers openly debate the easing of the debt-to-income ratio, because relaxing the loan restriction is, at the moment, the only means we have of revitalizing the real estate market.
The DTI ratio, which is based on the borrower’s income, and limits lending to only what that borrower can afford, is necessary to ensure the stability of the financial system. If removed without discretion, household debt could reach levels that are unsustainable and wreak havoc on our entire economy.
Fearing such repercussions, the Ministry of Strategy and Finance and the Financial Supervisory Commission have been advising against an easing of the DTI cap. They got their wish.
In a meeting chaired by the president last week, the government decided to keep intact the DTI and the loan-to-value ratio - the other yardstick used to determine lending risk. That means that the authorities have chosen financial stability over stimulus.
The two lending risk evaluation tools were adopted to guard against reckless investment and bubbles in the real estate market. If a prolonged slump and excessive deflation in property asset prices jeopardize the economy, the government has room to make adjustments.
If the loan restriction is eased, speculators may be the only ones to benefit. Many borrowers already spend half of their annual income paying bank loans and interests. Further relaxation of the cap could lead them into sky-high debt and insolvency.
But we believe it should be up to the banks to decide whether or not to ease their loan qualification criteria - not the government.
The financial and monetary authorities should employ a policy mix of higher interest rates and financial regulation with enough flexibility to prevent a real estate market collapse. They could also consider a temporary easing of the DTI cap.
We urge the authorities to use their best wisdom to aid the real estate market without hurting the financial system.