[Inside Chodong]Taming Seoul Housing Prices Is Too Much for Bank Loan Regulations Alone

Changhwan Lee, Deputy Head of Economic and Financial Department

"It is not easy to curb the rise in Seoul housing prices through regulation alone. Supply measures are absolutely necessary."

Recently, financial sector experts I met unanimously stated that it is nearly impossible to stabilize real estate prices with financial regulations alone. They explained that even if bank loans are restricted, it is difficult to control people's desire to live in expensive and high-quality homes.

In order to prevent excessive increases in housing prices, the government has imposed limits on loans by applying the stress-based Debt Service Ratio (DSR), and has implemented various regulations such as the Land Transaction Permit System (Toheje). Nevertheless, housing prices in major areas of Seoul have surged this year, and now the heat of rising prices is spreading to the outskirts of Seoul and the greater metropolitan area. This is a clear example of the so-called 'balloon effect' of regulations.

When examining the causes of rising housing prices, there are several factors: increased liquidity resulting from interest rate cuts, and heightened expectations for a revitalized real estate market following the change of administration. In addition, many people who do not own a home are feeling anxious?seeing others buy homes and grow wealthy, they fear becoming what is colloquially called 'Byeorakgeoji' (sudden pauper), which further drives them to purchase homes.

The problem of insufficient supply is also significant. Due to the lack of adequate housing supply in the Seoul area over the past several years, expectations that there will be a shortage of homes in Seoul for the next few years are pushing prices even higher. There are only a limited number of desirable homes in popular neighborhoods, but demand is overwhelming. If people expect prices to rise even further, it is only natural to want to buy the desired home even at a premium. In the past, there was much criticism that sharp increases in real estate prices would worsen housing difficulties, deepen polarization, and hinder social development. Now, however, such criticism is rarely heard. People are left stunned, simply watching as housing prices skyrocket in an instant.

The financial authorities' perspective on rising housing prices is complicated. For now, with the third phase of the stress DSR set to be implemented next month, they hope the situation will improve compared to now. Although there is discussion in some quarters about raising the risk weight for mortgage loans or applying the DSR to Jeonse loans, these measures are still under review and are unlikely to be implemented immediately.

Since financial regulations have already been implemented to a considerable extent, some hope that the new administration will introduce effective real estate policies. In particular, there are high expectations for supply-side measures. The painful lesson learned during both the Moon Jae-in and Yoon Suk-yeol administrations is that it is impossible to control housing prices with regulations alone, without increasing supply. Even if the third phase of the DSR is implemented, its effect on curbing price increases may only be temporary. The fundamental solution is to build more homes in desirable neighborhoods to address the root cause of rising prices.

Despite market expectations, the Lee Jaemyung administration's real estate supply measures remain unclear. As housing prices soared, a Real Estate Market and Supply Situation Task Force (TF) meeting was held on June 12, with a pledge to mobilize all available policy tools, but the market remains red-hot. The National Policy Planning Committee is reportedly negative about creating new towns. Yet, no clear alternatives have been presented. In the market, major supply-side measures being proposed include easing regulations on urban redevelopment and reconstruction, resolving delays in permits and approvals, and accelerating the construction and increasing the supply of the third-generation new towns. The new administration is urged to recognize the seriousness of the real estate situation and to come up with faster and more effective measures.