Growth is slowing. The Bank of Korea, which forecast in December that the Korean economy would grow 3.7 percent this year, has recently trimmed the growth outlook to 3.5 percent.
It should not come as a surprise if the central bank makes a spate of downward adjustments again, as it has done in the past. Last year, it had to revise its growth forecasts several times, as economic conditions worsened both in Korea and across the world.
Bearing the direct impact are households, whose income is stalling. Their debt is snowballing, surpassing the 900 trillion won mark ― a cause of great concern to top economic policymakers and private economic experts, who are wondering aloud if the nation is sitting on a time bomb.
Feeling the pinch acutely are those who have borrowed money to buy homes in anticipation that their prices would rise, as they had done before the Great Recession began to bite in 2008. They say they are “house poor” ― a term used to describe those homeowners that spend so much on mortgage payments that they have little money left for discretionary spending.
Moreover, the property market is in a slump. The number of home trades reported in the first quarter of this year dropped to 50 percent of the level marked a year ago. Prices of apartments in Seoul’s metropolitan area are at the lowest level since the Great Recession.
The anemic property market is a political liability for the ruling Saenuri Party. No wonder there is much talk among its leaders about spurring it. But the problem is the downside of the proposed market stimulation, including an increase in consumer prices and an accelerated rise in household debt.
The course of action being seriously considered by the ruling party is to push for the legislation of government policies that have been shelved since they were announced in December. They include the bills on waiving higher rates of tax on capital gains of families owning two or more homes and a hefty tax on development gain.
The proposed passage of the shelved bills anytime soon would require much politicking on the part of the ruling party, given that they are not much of a concern to members of the outgoing 18th National Assembly. Nor will it be any easier to push for legislation when the new legislature is inaugurated in June, because the ruling party is set to maintain majority status by a thin margin.
A plausible alternative to the proposed legislation is an administrative action that can be taken to ease regulations on borrowing for home purchases in Seoul’s three premium residential districts south of the Han River. This requires the finance minister to free the districts from their designation as potential areas of property speculation.
If the administrative measure is taken, the debt-to-income ratio will be raised from the current 40 percent to 50 percent, allowing homeowners to borrow more money from banks. Freeing the three districts from the designation has other serious ramifications as well, given that property booms in the nation have usually started in those districts in the past.
The administration has taken caution against the proposal in the past, not only because it fears a nationwide property bubble, but also because it is worried about the possibility that households will take on more loans at a time when their debt is already at a dangerous level.
But a subtle shift is now being perceived in the administration’s policy. The finance minister is quoted as saying, “The household debt is a headache. But some argue that the debt level will fall if the DTI ratio is raised. We are listening to that opinion as well.”
He says the administration was seeking to enliven property transactions while keeping home prices stable. That should be a magic solution. But it is easier said than done.
Market intervention has a great risk of stoking inflation, creating a property bubble and raising the debt level ― a recipe for another financial crisis. The administration will do well to let the market sort things out.
