It’s now up to the banks

The government came up with an emergency stopgap program in the hopes of propping up the property market. It plans to temporarily lift the debt-to-income mortgage loan cap until the end of March next year for Seoul home buyers, except for those in Gangnam, Seocheo, Songpa - districts that are subject to speculation risks.

Advanced bookings for subsidized housing will also be reduced and tax breaks for multiple-home owners will be extended by two more years.

The new measures released on Sunday exceeded market expectations. The government eased its key regulation to rein in real estate speculation and reckless mortgage lending - albeit temporarily - and backtracked slightly on its signature property campaign promise of providing more affordable housing to first-time home owners. The deregulation may revive the stagnant real estate market. Critics say the government eased up too much and this may cause speculation. But their argument lacks an awareness of the grave state of the real estate market.

In fact, the new measures may prove helpless against the bottlenecks in real estate transactions and the downward spiral in apartment prices for 20 weeks in a row.

The market is virtually dead.

The fear of a double-dip recession in the global market also would likely keep spending and investment suppressed. The government’s stronger-than-expected stimulus measures are therefore a desperate aim to encourage investment and save the market before it is too late.

But we cannot rule out the downside. The temporary lift in the DTI restriction is aimed at encouraging consumers to borrow more to buy houses. The current DTI cap prohibits banks from lending more than 50 percent of the borrower’s annual income to buy housing in Seoul and 60 percent in other areas.

Of course, banks can choose not to comply with the new rules out of fear of issuing risky loans. Moreover, authorities have kept the loan-to-value limits for real estate loans intact.

Still banks will be tempted to encourage and extend mortgage loans more aggressively.

Household debt was already at the staggering level of 711.6 trillion won ($596.7 billion) as of the end of June and will consequently increase. Real estate market woes can spill over to a household debt crisis.

Therefore, banks should exercise prudence in applying deregulation. They must increase loans reasonably based on the good judgment of their clients and refrain from reckless lending.

Taxpayers do not have the patience to bail out banks again if they flounder on consumer debt defaults.