Skepticism greets wider DTI ratio

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Skepticism greets wider DTI ratio


Dark clouds loom over the apartments of an affluent neighborhood in Gangnam, southern Seoul, on Monday. Despite the government’s efforts, apartment prices in Seoul recently saw the sharpest drop in two years. This has prompted queries about whether moves to ease the debt-to-income ratio on loans will give the struggling real estate market and construction industry a boost. [YONHAP]

The housing market remains skeptical about the government’s latest measure to ease the debt-to-income (DTI) ratio restriction.

The new measure came amid falling housing prices, as the government’s previous announcement in May of a comprehensive policy package aimed at giving the ailing property market a shot in the arm seems to have fallen flat.

The Financial Services Commission said on Aug. 17 that it will apply higher DTI ratios for employees under the age of 40 and retirees who own assets that can be converted into income.

Coincidentally, that date also marked the 100th day since the government released new measures on May 11 to ease restrictions on property transactions and lighten tax codes.

The DTI ratio determines the maximum amount of loans a person can take out to buy a house in proportion to their annual income. It currently stands at 50 percent in the capital and 60 percent for the greater Seoul metropolitan area. It was introduced in 2006 by the former Roh Moo-hyun administration to reduce the risk of a rapid increase in mortgages.

Property analysts have been giving the latest move a big thumbs down as they remain pessimistic about falling housing prices.

According to the Ministry of Land, Transport and Maritime Affairs yesterday, the average price of apartments in Seoul dropped 9 percent in July from June 2008, when the local housing market started to see growth decelerate. Nationwide, average home prices plunged nearly 10 percent over the same period.

Against this backdrop, realtors say that applying higher DTI ratios for employees in their 20s and 30s in a bid to prop up the stagnant property market will inevitably fall short of the mark.

A 54-year-old realtor said he doubts whether raising the upper cap on mortgages for young employees would have any impact on the frozen market.


“Houses are not on the shopping lists of young people nowadays,” said Choi Ki-hoon, a real estate dealer in Seocho, southern Seoul. “So they wouldn’t really consider buying one even if the loans become more accessible.”

Other realtors complain that the government has made another misstep, with one in Seoul describing it as “absurd” to encourage people to take out loans to buy houses when they know property prices will keep falling and household debts are skyrocketing. “Rather than raising the DTI ratio, cutting taxes for those who purchase houses would be a more effective method,” Choi said, adding that there has been no apparent change in the number of property transactions in the wake of the DTI announcement.

The total number of apartments traded in the first half fell to 231,000, down 37 percent from one year earlier, the land ministry said. This marks the lowest figure since the country began tracking such data in 2006, highlighting the depressed state of the market.

Some 20,000 apartments were sold in Seoul over the cited period, down 41 percent from the previous year.

The prices of newly built apartments in the capital also plunged 35 percent as builders failed to balance supply and demand, the ministry said. According to Real Estate 114, an information source for the local property market, only four in 100 young employees are likely to benefit from the higher ratios for mortgages.

“The new DTI measure is confined to particular age groups, so it won’t impact the whole market,” said Kim Gyu-jung, head of the research center at Real Estate 114. “Even if the gambit works, it will take time for young people to sign up for loans to buy houses given the current economic downturn.”

By Song Su-hyun []
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