Gov’t hopes loans will give lift to real estate

The Korean government has introduced two new mortgage programs and a slash in the acquisition tax in another attempt to revive the moribund real estate market.

The Ministry of Land, Infrastructure and Transport and the Ministry of Strategy and Finance yesterday announced the government’s second policy package to boost transactions in the frozen real estate market. The first package of eased regulations and tax cuts was announced April 1, but most of the measures are currently pending at the National Assembly.

In response to President Park Geun-hye’s order a week ago to find measures to ease the burden on people who can’t find affordable housing amid spikes in jeonse, or long-term deposits, the ministers of related government branches put their heads together.

“The recent jeonse crisis has stemmed from a structural change in the housing market,” said Hyun Oh-seok, deputy prime minister for the economy and finance minister, at a joint press conference yesterday. “The government has come up with a plan to turn demand for jeonse into sales [of housing units] by as early as this autumn.”

The Korean housing market is depressed for a number of reasons, but one is because jeonse is falling out of favor and monthly rental payments, like in the West, is rising.

Landlords are turning away from jeonse deposits because they earn so little interest at the banks, and monthly rent payments are more lucrative.

At the same time, more people are forced to rent instead of buy because the real estate market has been in the doldrums for years and owners don’t want to sell at current low prices, especially if they have to sell at a loss.

That has caused a shrinkage in the supply of jeonse houses and a hike in prices by 2.1 percent as of July this year, compared to last year across the nation.

But Koreans, especially the baby-boom generation, are used to the jeonse system.

Real estate has been flat since the Roh Moo-hyun administration’s restrictions on real estate speculation.

The new mortgages announced yesterday are meant to encourage real estate purchases.

One of them is the brainchild of the Korean government, which has dubbed it a “profit-sharing” mortgage.

For married couples with less than 70 million won in annual income, the state-run housing fund will provide 20-year mortgages at a 1.5 percent fixed interest rate for an apartment or house smaller than 85 square meters (915 square feet) or cheaper than 600 million won ($537,553).

People can use the mortgages for up to 70 percent (about 200 million won) of the buying price. They must be first-time buyers.

The other mortgage is a British import. The government has copied elements of the U.K. government’s Help to Buy equity loan policy introduced this year to help first-time home buyers regardless of their income. The government provides loans for up to 20 percent of house prices.

The new mortgages announced yesterday are meant to encourage real estate purchases.

One of them is the brainchild of the Korean government, which has dubbed it a “profit-sharing” mortgage.

For married couples with less than 70 million won in annual income, the state-run housing fund will provide 20-year mortgages at a 1.5 percent fixed interest rate for an apartment or house smaller than 85 square meters or cheaper than 600 million won. People can use the mortgages for up to 70 percent (about 200 million won) of the buying price. They must be first-time buyers.

The other mortgage is a British import. The government has copied elements of the UK government’s Help to Buy Equity Loan policy introduced this year to help first-time home buyers regardless of their income. The government provides loans for up to 20 percent of house prices.

The Korean version will offer 20-year mortgages for up to 40 percent of housing prices. For the first five years, the interest rate will be 1 percent. For the rest of the period, the rate will be 2 percent.

The biggest difference in the two new programs is that under the profit-sharing mortgage, the government and homeowners share the profits if housing prices rise during the 20-year period of the mortgage. The government can take up to 5 percent of price increases. If prices fall, homeowners take all the losses. They must pay back the interest and principle even if housing prices decline.

The U.K. model has the government and homeowners sharing both profits and losses when housing prices go up or down. Again, the homeowners are required to pay back the entire loan.

The new mortgages will help cut annual housing costs including interest payments for eligible families by around 3 million won compared to existing mortgages, the government said.

They will be available exclusively through Woori Bank, which is currently managing the government’s housing fund.

“The government is kind of investing in people’s houses,” said Doh Tae-ho, a senior official at the Land Ministry. “The government basically forecasts housing prices will increase in the next two decades if the market is normalized, so people won’t have to take losses incurred by falls in prices as long as they are on the 20-year program.”

The government dismissed worries about a possible rise in the so-called “house poor,” which refers to people who bought homes with mortgages but can’t sell it because the home price went down and can barely afford anything but the mortgage payment every months.

Economic analysts said encouraging people to buy houses with mortgages is “bad policy.”

“The government has failed to hit the right target,” said Kim Kwang-seok, a research fellow at Hyundai Research Institute. “Macroeconomists say investors shouldn’t invest in real estate for the time being because they are pessimistic about real estate prices. Introducing new mortgages is completely the opposite of what the government should do.

“Turning jeonse into sales based on mortgages can’t be a fundamental solution,” he added. “We would suggest imposing an upper cap on the monthly rent-to-jeonse price to ease uncertainties in supply and demand.”

Yesterday’s plan included cuts in acquisition taxes, too.

The Ministry of Security and Public Administration and the Finance Ministry agreed to a 1 percent acquisition tax for people buying houses priced 600 million won or less, 2 percent for those houses between 601 million and 900 million won and 3 percent for over 900 million won.

The current tax law has a 2 percent tax for houses of 900 million won or less and 4 percent for houses over 900 million won. The tax is also 4 percent for multiple homeowners no matter what price.

In order to help out working-class people who have to live on monthly rents, the government will expand income tax credits. It will provide up to 5 million won a year as an income tax credit, increased from a current 3 million won.

The government will also provide an additional 23,000 public rental houses from September through December to ease the imbalance in supply and demand.

BY SONG SU-HYUN [ssh@joongang.co.kr]