"Tightening Mortgage Loans Won't Curb House Prices Even If Transactions Decrease"

Experts Skeptical About Loan Regulations
Only Temporary Demand Suppression Effect
Expect Sales to Disperse to Other Areas
Restrictions on Jeonse Loans to Prevent Gap Investment
Tenants May Also Suffer

Financial authorities have tightened regulations on mortgage loans to curb rising house prices, but experts remain skeptical. While transactions may temporarily decrease, the measures are deemed insufficient to control the soaring housing prices. In a situation where expectations of rising house prices have grown, loan restrictions are expected to cause a balloon effect, where buyers lower their standards and purchase different homes rather than giving up on buying altogether. This means that demand may not decrease but instead spread to surrounding areas. Some view the current loan regulations as a preparation for shocks from future interest rate cuts, while others argue that the regulations will have limited impact since transactions in the Gangnam 3 districts, the epicenter of rising house prices, are mostly conducted in cash.

Stricter Loan Restrictions

According to the financial and real estate industries on the 29th, as apartment prices and transaction volumes continue to rise, financial authorities have intensified pressure on household loan management. Starting next month, the second phase of the Debt Service Ratio (DSR) stress test will be implemented, causing mortgage loan interest rates to rise and loan limits to decrease.

Lee Chang-yong, Governor of the Bank of Korea, recently expressed concerns about the real estate market while deciding to keep interest rates unchanged. On the 27th, Governor Lee stated, "There is a lack of reflection on why we have fallen into the swamp of real estate prices to the extent that we hesitate to lower interest rates now." On the 25th, Lee Bok-hyun, Governor of the Financial Supervisory Service, criticized banks for responding with easy measures such as raising interest rates. Subsequently, banks shortened loan maturities, stopped conditional jeonse (long-term deposit lease) loans aimed at gap investments, and blocked mortgage insurance for new mortgage loans.

According to the KB Real Estate Weekly KB Apartment Market Trend report, last week Seoul apartment sale prices soared by 0.22% in just one week. The photo shows the Granja Apartment in Mapo-gu, Seoul, on the 5th. Photo by Jinhyung Kang aymsdream@

"Difficult to Control House Prices"

Experts define these tightened loan restrictions as demand suppression measures and expect them to lead to a temporary decrease in transaction volume. However, they predict it will be difficult to curb the long-term upward trend in house prices. Yoon Soo-min, Real Estate Specialist at NH Nonghyup Bank, said, "Demand suppression measures may have an immediate effect, but over time, people tend to adapt. In the long run, the solution lies in increasing supply."

Kwon Young-sun, Team Leader of the Real Estate Investment Advisory Center at Shinhan Bank, analyzed, "As the real estate market heats up, there is a mentality that if prices rise but loans are available, people will buy." She added, "Currently, market interest rates have come down compared to the period of base rate hikes, so real buyers do not feel that obtaining loans has become more difficult than before."

Experts agree that real estate policies aimed at suppressing demand have clear limitations. Yoon Ji-hae, Senior Researcher at Real Estate R114, said, "If demand regulations are applied like playing whack-a-mole, side effects will occur elsewhere like a balloon effect. Demand decreases when the economy is poor and the market is stagnant, but if loans are blocked while transactions are active as now, sales will just disperse to other regions." Professor Ko Joon-seok of Yonsei University's Graduate School of Business also said, "Reducing loan limits and high-interest policies have limitations in curbing house price increases."

There is even an analysis that the tightening of loans in the financial sector is a prelude to future interest rate cuts. It is seen as a mechanism to prevent house prices from rising further by releasing funds into the market. Song Seung-hyun, CEO of Urban and Economy, said, "The financial authorities' push for stricter loan conditions can also be interpreted as a signal that the base interest rate will be lowered soon. Even if the real estate market temporarily contracts due to the current loan restrictions, transaction volumes can recover once the base rate is lowered."

On the 5th, apartment sale and jeonse prices were posted on real estate in Mapo-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Harder for Ordinary People to Own Homes

With strengthened loan regulations, it has become more difficult for the middle class and ordinary people, who rely heavily on loans, to own homes. Senior Researcher Yoon said, "Although real estate regulations continue only in the Gangnam area, prices there recover the fastest. Since many transactions are conducted in cash, loan limits and interest rates have little effect." He added, "Ultimately, this only raises the entry barriers for real buyers trying to purchase homes in the outskirts of Seoul." Specialist Yoon also said, "Buyers who planned to purchase apartments priced between 900 million and 1.2 billion KRW by borrowing to the maximum extent possible may be restricted by loan limits. Areas like Nodogang (Nowon, Dobong, Gangbuk) and Geumgwan-gu (Geumcheon, Gwanak, Guro), where price recovery has been slow, will face regulations as they follow the upward trend."

There are also concerns that the financial sector's announcement to stop issuing conditional jeonse loans as a measure to prevent 'gap investments' could worsen confusion in the jeonse market. This means that loans will not be provided for jeonse deposits on homes being sold, and if loans are blocked, tenants may also suffer. Team Leader Kwon said, "The jeonse market is supported by real demand. Jeonse supply will decrease, and price increases are inevitable." CEO Song also added, "Stopping jeonse loans for gap investments could burden jeonse tenants amid rapidly rising jeonse prices. Expanding this to other commercial banks or broadening jeonse loan regulations should be done gradually."

This content was produced with the assistance of AI translation services.