[2024 Economic Policy] 85 Trillion Executed for Smooth Landing of Real Estate PF... Household Debt Ratio Below 100%

Announcement of '2024 Economic Policy Directions'
Proactive Support for Construction Companies and PF Sites
Household Debt Managed Within 100% of GDP by 2027

Choi Sang-mok, Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance, is delivering a New Year's address at the '2024 Pan-Financial New Year's Meeting' held on the 3rd at Lotte Hotel in Jung-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

With the Taeyoung Construction workout crisis putting the financial sector on high alert over real estate project financing (PF) since the beginning of the year, the government is swiftly implementing a liquidity program worth 85 trillion won for construction companies and PF sites, and is considering a plan for the Korea Land and Housing Corporation (LH) to purchase and normalize projects temporarily facing liquidity difficulties.

Additionally, the government has set a goal to manage the annual growth rate of household debt within the nominal growth rate, aiming to reduce the household debt-to-GDP ratio to within 100% by 2027. For private financial institutions, it plans to establish a fixed-rate loan handling base to increase the proportion of fixed-rate mortgage loans to around 50%.

On the 4th, the government presented these real estate PF soft-landing measures and household debt management plans through the '2024 Economic Policy Direction.'

First, the government intends to promptly execute the liquidity supply program of about 85 trillion won, which was included in last September’s housing supply activation plan, in accordance with market conditions. It will also pursue expanding the liquidity supply scale further if necessary. The purpose is to proactively support liquidity so that construction companies and PF sites do not suffer from liquidity shortages due to the contraction of the PF market.

The government plans to encourage extending the debt assumption timing for construction companies that have passed their completion deadlines and strengthen liquidity support through the Construction Guarantee Association. The extension of the debt assumption timing will be made possible through creditor agreements based on shared responsibility, such as partial purchase of subordinated bonds and equity investment. Through the Construction Guarantee Association, 6 trillion won will be invested to accelerate the execution of performance guarantees, 4 trillion won for establishing non-residential PF guarantees, and 400 billion won for special loans to construction companies.

Customized management and support for normalizing PF sites will also be undertaken. The government plans to inspect difficulties for each PF site and promote restructuring for projects that are at risk of insolvency or confirmed to be insolvent.

For normal projects, the government will ensure timely liquidity supply and induce correction of unreasonable matters such as excessive fee charges. For projects temporarily facing liquidity difficulties, the government is considering a plan for LH to purchase and normalize them. After reviewing project feasibility, LH will either directly implement the project or sell it to other developers or construction companies.

In cases where project feasibility is somewhat lacking, the government will support normalization by promoting project acquisition and restructuring through a PF normalization fund worth 2.2 trillion won. If a project finance investment company (PFV) within the 'PF Normalization Fund,' jointly invested by the Korea Asset Management Corporation and the private sector by 2025, purchases real estate, acquisition tax will be reduced by 50%.

Furthermore, based on the results of a research project to be completed by April this year, the government will fundamentally improve the real estate development project promotion methods to enhance the stability of the real estate PF market. A plan to strengthen land trust to protect buyers and expand stable real estate supply capacity will also be prepared within the first quarter.

Follow-up measures for real estate market normalization, such as amendments to the Enforcement Decrees of the 'Reconstruction Excess Profit Recovery Act' and the 'Old Planned City Special Act,' will be carried out step-by-step. The amendment to the 'Reconstruction Excess Profit Recovery Act,' scheduled to be enforced in March, expands the contribution rate range to 10-70% and applies special exemptions on charges for long-term residents. The amendment to the 'Old Planned City Special Act,' to be enforced in April, includes incentives such as floor area ratio and safety inspections for old planned cities like first-generation new towns.

The government explained, "We will promote an orderly soft landing and fundamental institutional improvements through tailored responses for each PF site while paying attention to financial stability," and added, "We will also swiftly proceed with follow-up measures related to legislative tasks for real estate market normalization."

Household Debt-to-GDP Ratio to be Managed Within 100% by 2027

Quantitative and qualitative goals have also been set for systematic household debt management. The government plans to manage the annual growth rate of household debt within the nominal growth rate and keep the household debt-to-GDP ratio within 100% by 2027. As of the second quarter of 2023, the ratio was 101.7%.

The government stated, "We will operate the 'Housing Policy Finance Consultative Body' to strengthen the management of policy mortgage supply speed," and "We will consider expanding the scope of the debt service ratio (DSR) application in the mid-to-long term within the range that does not exacerbate difficulties in vulnerable sectors."

For qualitative improvement, the government will establish a fixed-rate loan handling base in private financial institutions and manage the fixed-rate mortgage loan ratio to around 50% by 2027. The fixed-rate mortgage loan ratio in the banking sector was 45.2% in 2021 and 45.5% in 2022. The government plans to strengthen incentives for contributions to the Housing Finance Credit Guarantee Fund based on the achievement of fixed-rate targets and reflect this in supplementary materials for differential evaluation of deposit insurance premiums.

The government said, "We will ease the burden of prepayment penalties on fixed-rate loans and reduce prepayment penalties when refinancing fixed-rate loans," and "We will prepare and promote measures to activate covered bond issuance and investment to expand the supply of long-term fixed-rate mortgage loans by commercial banks."