Risky turnabout

Cautious approach needed over DTI rule change

The government has opened a Pandora’s box in a desperate bid to revitalize the dormant real estate market.

However, the decision to ease debt-to-income (DTI) regulations on mortgages might be a risky choice that could devastate the already-sagging economy.

The proposed change was part of measures aimed at stimulating the domestic market the government announced Sunday after a 10-hour meeting presided over by President Lee Myung-bak.

Under the proposal, the basic structure of the DTI scheme will remain intact but its uniform restrictions will be alleviated in such a way as to let prospective home owners with personal assets such as property, deposits or stocks take out mortgages.

The DTI regulation, which was introduced in 2006 under the Roh Moo-hyun administration, is a major tool to control housing loans by tying the maximum amount of money that home buyers can borrow to their income levels. The ceiling is 50 percent in Seoul and 60 percent in Incheon and Gyeonggi Province.

The rule was instrumental in cooling down the previously overheated property market. But, more recently it has often been cited as one of the main culprits behind the deep slump of the local real estate sector.

The envisioned change appears to be targeting retirees who are rich in assets but deficient in income. Advocates of the rule change argue that the DTI regulation, ironically enough, has prompted property prices to fall further and caused household debt to inflate.

More realistically, the government’s latest move is a desperate measure to boost domestic demand at a time when the global economy is shrinking amid the eurozone crisis, America’s slow recovery and China’s economic slowdown. Specifically, it is aimed at giving a reprieve to homeowners who are trapped after buying real estate, mostly apartments, with excessive borrowing.

Easing the DTI rules will hardly bring the desired effects of activating real estate transactions and property price recovery. Rather, loans to households will swell, adding to the already-serious household debt problem.

Critics say this is like the government encouraging people to buy homes with borrowed money. As of the end of last year, household debt, which is often called the time bomb of the Korean economy, amounted to 921 trillion won.

It’s regrettable for President Lee Myung-bak to change his position on the DTI issue in a matter of a month. The embattled head of state had been adamant in stating that the rule change wouldn’t boost the property market and rather result in household debt rising further. But he has changed his stance without giving any particular reason.

The most serious problem is that the rule change could serve as an occasion for the core of the DTI regulation to become powerless. That is, the basic framework of the system could break down, prompting more people to look for loopholes.

In a nutshell, the government should shy away from stopgap measures and focus on fundamental steps such as lowering property acquisition taxes and dismantling unnecessary red tape. <The Korea Times>

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