IMF suggests to Korea to keep tight mortgage policy

SEJONG -- The International Monetary Fund has recommended South Korea keep practicing policies for tight mortgage regulations, showing a substantial difference from policy directions suggested by the incoming Yoon Suk-yeol administration.

In a report on its yearly consultations with Korean officials, the IMF recommended that the government draw up “measures to improve housing supply.”

But the US-based organization suggested that Korea keep on practicing policies of conducting tight mortgage regulations. This could mean its support for the currently quite low loan-to-value (LTV) ratio and the debt service ratio (DSR), which sternly limit the ceiling of loans, issued to homebuyers.

“(Dispatched directors) welcomed the recent tightening of macroprudential policies,” the IMF said. “They also encouraged the authorities to stand ready to tighten macroprudential policies further as necessary.”

This contrasts with the real estate-related pledge of President-elect Yoon, who had promised to carry out drastic deregulations such as easing the LTV -- and possibly DSR, simultaneously -- in a bid to vitalize the property market by letting banks actively issue mortgage loans.

Local market insiders interpreted the IMF’s suggestion for managing housing supply -- under maintenance of tight, or tighter if necessary, mortgage rules -- to mean managing housing supply via revising the taxation system.

A real estate agent said vitalization of the real estate market would be possible by slashing the burden of homeowners over the capital gains tax and the comprehensive real estate tax.

Concerning Korea’s risks, the IMF picked COVID-19 developments, the elevated household debt and real estate prices. It said “risks to inflation are to the upside.”

Regarding the fiscal situation, the organization predicted that the ratio of general government debt to gross domestic product would surpass the 50 percent mark for the first time this year.

It estimated that the government debt-to-GDP ratio came to 49.6 percent in 2021, with forecasting the ratio would reach 51.1 percent in 2022.

The prediction is somewhat in line with predictions among local economists, who had raised worries over fiscal soundness in the wake of sharp increases in government expenditure in recent years.

According to the IMF’s calculation, the government debt-to-GDP ratio stayed at 42.1 percent in 2019 and 48.9 percent in 2020.

Nonetheless, the IMF agreed that the current fiscal policy appropriately supports policy normalization. “Korea has ample fiscal space to provide targeted support to the economy in the event that stagflationary pressures arise,” it said.

Over the medium term, implementing a rules-based fiscal framework would help anchor public finances and preserve countercyclical fiscal space, against pressures from demographic and reform needs, it said.

“In this context, (dispatched) directors recommended further strengthening automatic stabilizers and broadening the tax base. Pension reform is also needed to ensure its sustainability,” it stated.

It also said Korea has recovered impressively from the COVID-19 pandemic, with activity surpassing pre-COVID levels despite multiple waves.

“The recovery was supported by the effective containment of the pandemic, including rapid vaccination in 2021, and pursuing proactive economic policy support, which helped minimize economic scarring, sustain income growth, and maintain financial stability,” said the IMF.

It added that “given Korea’s high global integration, strong external demand also supported the recovery.”

By Kim Yon-se (kys@heraldcorp.com)