South Korea keeps nervous watch on property prices

SEOUL: South Korea's relentless house price rise is a top concern for the government but it realises that the recent spate of lending controls to calm the market could cause wider problems, senior officials said on Oct 12.

The issue of property prices has been at the centre of a very public debate between the government and the central bank over whether interest rates should start moving up from their current record low.

The government argues that a rate rise could knock the nascent economic recovery off kilter. The central bank, though less forcefully in recent days, has warned that the property market boom has dangerous implications for the economy.

"Keeping (house) prices in check will remain one of the single most important policy objectives of the government," a high ranking official told reporters, pointing to the need to ensure the underprivileged were not put at a disadvantage by the rising property market.

"We will have to live with upward pressure on house prices," said the official, who spoke on condition of anonymity due to the sensitivity of the issue.

South Koreans on average invest around 80% of their assets in property, far more than in comparable and wealthier economies.

The impact of the rally is focused entirely on the capital, in particular its southern districts. Outside the urban sprawl of Seoul -- home to half the population -- he said there was oversupply.

The central bank has singled out the house price surge, which shows no sign of waning, and an accompanying jump in household debt as posing a major risk to the economy.

On Oct 9, it softened its stance on what had earlier been taken by investors as a clear signal it was ready to hike interest rates to prevent any property market bubble.

The central bank said government curbs on lending have brought about some welcome moderation in mortgage credit growth.

Some analysts now say it may even wait until early next year before lifting rates from the record 2% low where they have stayed for eight consecutive months.

The high-ranking official reiterated the government's view that the domestic economy was still not back to normal and consequently it was too early to start unwinding fiscal and monetary stimulus deployed during the financial crisis.

Separately, the country's top regulator told lawmakers the government realised that more lending controls could hurt overall household finances.

"Middle-class people will not be able to buy homes if the LTV and DTI are lowered excessively," said Financial Services Commission chairman, Chin Dong-soo, referring to two main methods the government has so far used to block price rises.

The LTV, or loan-to-value ratio, is used to limit the amount of mortgage loans according to the value of the home used as collateral while the debt-to-income (DTI) ratio is used to limit borrowing in relation to the borrower's income.

The government has also in recent weeks imposed controls on mortgage loans.

Chin gave no details of other options but past governments have used property tax raises and the promise of large-scale apartment construction to try to dampen demand. -- Reuters