S. Korea to Ease Mortgage Lending Rule to Spur Consumption

South Korean President Lee Myung Bak
Lee Myung Bak, South Korea's president. Photographer: Kim Byung Yeon/Pool via Bloomberg

South Korea will ease a rule on mortgage lending to stimulate the real-estate market and boost consumption as faltering global demand hurts the export-reliant economy, an adviser to President Lee Myung Bak said.

“We have seen that there are many irrational aspects to the debt-to-income ratio limit” banks apply to residential mortgage borrowers, Kim Dae Ki told reporters yesterday in Seoul. “While we will maintain the basic framework of the regulation, we concluded that certain irrational parts of the rule should be eased,” he said, without elaborating.

South Korea’s central bank unexpectedly cut its benchmark interest rate on July 12 for the first time in more than three years as policy makers stepped up measures to counter the impact of Europe’s debt crisis, a Chinese slowdown and muted U.S. job creation. Growth in Asia’s fourth-largest economy may have slowed to 0.5 percent in the second quarter from the previous three months, according to the median estimate in a Bloomberg News survey ahead of a preliminary report due July 26.

“We expect Korea’s export-oriented economy to continue to struggle amid tougher global economic conditions,” economists led by Mark Williams and Andrew Kenningham at London-based Capital Economics Ltd. wrote in a note dated July 23. “As a result, the Bank of Korea’s policy rate cut this month is likely to be followed up with more loosening soon,” they wrote.

Special Meeting

Kim spoke to reporters a day after Lee convened a special meeting to discuss and review policies for the second half of the year. Attendees included the prime minister, ministers responsible for portfolios including the economy, labor, welfare and land, the central bank governor, business leaders and economists.

South Korea’s Finance Ministry said in a statement today that it would provide specifics on measures to stimulate domestic consumption “as soon as possible.” The plan will be discussed today at an inter-ministerial meeting led by Vice Finance Minister Shin Je Yoon, Kim said yesterday.

The Kospi Index of South Korean stocks fell 2.2 percent as of 12:23 p.m. in Seoul, dropping along with other regional benchmarks on concern Europe’s debt crisis is worsening.

Home prices in Seoul and surrounding areas have stalled after a 66 percent jump in the decade to February 2008 raised household debt to record levels and triggered government measures to cool the market.

Prices Fall

Residential property transactions in greater Seoul fell 38 percent from a year earlier in the January-April period, according to data from the Ministry of Land, Transport and Maritime Affairs. Home prices nationwide have dropped 0.7 percent this year, according to an index compiled by Kookmin Bank, the nation’s largest lender.

When housing prices fall, banks tend to seek faster repayment of loans or increase interest rates, Kim said. “We don’t want to further raise the burden for mortgage holders as a result of falling real-estate prices,” he said.

Among measures being considered are exemptions from some deposit-to-income ratio regulations for wealthy retirees who have real-estate assets, Kim said.

The Bank of Korea on July 13 reduced its 2012 forecast for economic expansion to 3 percent from a 3.5 percent prediction in April, two weeks after the Ministry of Knowledge Economy cut its estimate for export growth to 3.5 percent from a January projection of 6.7 percent.

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