South Korea's homebuyers buoyed by eased mortgage curbs

After moving six times in 10 years, chemical researcher Choi Youn-ho is hopeful easier mortgage rules will finally allow him to buy a home on the outskirts of Seoul for his family of four.

"I'm sick and tired of finding a new home, packing and moving every two years, whenever the lease contract expires," said Choi, who works at a chemical trading firm and had a 24 per cent increase in rent in May when he moved into a new three-bedroom apartment. "I can get a bigger loan now; it may be the time to finally buy a home rather than swallowing this crazy rent rise."

South Korea relaxed banks' mortgage restrictions this month as Finance Minister Choi Kyung-hwan, appointed last month, seeks to revive a property market in Asia's fourth-largest economy, boost growth and stimulate domestic consumption.

A nationwide weekly apartment purchase price index hit a six-year high on August 18, according to Kookmin Bank data.

The new policies were "stronger than people had expected and are thawing the market", said Shim Gyo-un, a real estate department professor at Konkuk University. "People who have been burdened by surging rents now are turning to buying as they have easier access to mortgages, and they feel bank loans are cheaper than rents."

The government increased the loan limit for homebuyers to 70 per cent of a property's value from as low as 50 per cent, starting this month. Borrowers will be allowed to use 60 per cent of their income for mortgage payments, up from 50 per cent for homes in Seoul, which had the most stringent lending rules.

Korea has avoided the surge in home prices seen in Hong Kong and Singapore in the past five years as the government tackled record household debt levels with measures including capping banks' lending to households and promoting fixed-rate mortgages.

Apartment prices in Seoul fell for the past four years after almost tripling in the previous 11 years, according to Kookmin Bank, the country's largest mortgage lender.

Prices for Seoul and the surrounding metropolitan area, where almost half of the country's 50 million people reside, have been stagnant since they peaked in 2008 after the previous decade of boom elevated household debt.

Easing mortgage curbs to boost the property market is at the centre of Finance Minister Choi's policies to stimulate growth - dubbed Choinomics after Japan's Abenomics, which refers to reflationary monetary and fiscal policies to revive economic expansion.

The Bank of Korea earlier this month cut the benchmark interest rate for the first time in more than a year to 2.25 per cent.

The average new mortgage loan rate was 3.58 per cent in June, the lowest level since the central bank began tracking the rate in September 2001.

The economy expanded at the weakest pace in more than a year in the past quarter and the central bank reduced its growth forecast for this year to 3.8 per cent.

The nationwide apartment purchase price index was 101.9 in the week of August 18, the highest level since April 2008, according to Kookmin Bank.

Prices in Seoul's affluent Gangnam area rose at the strongest pace in more than five months in the week to August 18, the data showed.

Some are sceptical of the measures' success.

Choi's determination to "normalise" the housing market and boost sentiment might exacerbate Korea's household debt without lifting home prices, said Lim Hyun-mook, the head of real estate at Shinhan Bank.

"Regardless of the mortgage rule changes, the fundamentals of the market haven't changed," Lim said. "People don't buy homes because they aren't certain about the future price gains and their income flow. It's not because they can't borrow enough money. The impact would be short-lived just like the government's previous measures."

A 10 per cent drop in home prices would more than double the interest-payment burden for those whose mortgages exceeded 60 per cent of the home value, the Korea Development Institute said in a report published in June, based on 2012 data.

The household debt, including loans and goods bought on credit, stood at a record 1,024.8 trillion won (HK$7.78 trillion) at the end of March, including 422 trillion won in mortgages extended by banks and other depository institutions, according to data from the Bank of Korea.

"The loosened mortgage rules should be reversed," said Jun Sung-in, an economics professor at Hongik University, saying that the nation needed to contain the debt risk. "Given that an interest rate cut followed the easing of the rules, loans on credit are likely to increase and add to the household debt risk."

The Financial Services Commission in February said it aimed to cut the country's household debt to disposable income ratio by 5 percentage points by 2017.

The country's 163.8 per cent ratio was higher than that of the United States, Canada and the average of member countries of the Organisation for Economic Cooperation and Development, the regulator said.

Finance Minister Choi's measures would boost the housing market in the short term, especially as interest rates fell, said Kim Kyung-soo, an economics professor at Sungkyunkwan University. "Loosened loan controls mean more than just more transactions; it means more business," he said.

That would come at the expense of more household debt, Kim said.

Prices for properties sold at auction are rising. The average auction price was about 87 per cent of what the property was valued at last month, the highest since at least 2008, according to Real Estate Taein, an online auction information provider.

"It's an upbeat sign that demand from potential homebuyers is rising, and that they are starting to take action," said Jung Dae-hong, an analyst at Taein.