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New measures to boost home transactions.

The Korean government unveiled new measures to boost home transactions on March 22. As part of the measures, the government will lower the real estate acquisition tax rate by half and seek to remove a cap on the price of newly built houses. Meanwhile, restrictions on debt-to-income (DTI) ratio were reintroduced as scheduled at the beginning of April.

Original measures

The Korean government announced on August 29, 2010 a temporary relaxation of DTI ratio regulations for mortgage loans in order to stimulate the depressed housing market. The temporary easing of the DTI ratio limit was applicable to those who do not own houses, and when they buy houses worth less than 900 million won in a non-speculative area, along with mortgage facilities of up to 200 million won available to first time home buyers. In addition, people who have multiple houses would have been able to avoid the heavy transfer tax for another two years from the end of 2010, and have benefited from the property acquisition tax reduction for another year from the same date. The August 29 measures have helped increase home transactions, although accompanied by rising household debt. To curb increasing household debt and keep boosting home transactions, the government announced another round of home transaction stimulus measures on March 22, 2011.

Apartment transaction volume in the Seoul metropolitan area (thousand)

9.0 (Sep 2010) [right arrow] 12.4 (Oct) [right arrow] 17.5 (Nov) [right arrow] 20.2 (Dec) [right arrow] 16.0 (Jan 2011) [right arrow] 19.9 (Feb)

Mortgage lending (trillion won)

2.6 (average between Jan and Aug 2010) [right arrow] 3.3 (Sep) [right arrow] 3.5 (Oct) [right arrow] 4.4 (Nov) [right arrow] 5.3 (Dec) [right arrow] 1.8 (Jan 2011) [right arrow] 2.8 (Feb)

New measures

1) Reinstatement of the DTI rule

The Korean government decided to end the temporary easing of the DTI ratio as scheduled at the end of March and the previously-imposed limit has been reinstated starting April. The DTI ratio is 40 percent for speculative areas, 50 percent for non-speculative areas in Seoul, and 60 percent for Incheon and Gyeonggi Province.

The March 22 DTI measure is designed to be complemented by preferential DTI ratios of up to 15 percentage points more, if a mortgage is conditioned without a grace period and with fixed-rate principal and interest installments. Credit ceilings of microloans to which the DTI regulation does not apply, is raised from 50 million won to 100 million won. Mortgage loan facilities for first time home buyers, scheduled to expire at the end of March, will be maintained by the end of 2011. The loan facilities are available to households in which all members do not own houses and whose household income is less than 40 million won a year, when they purchase houses worth less than 600 million won and smaller than 85 [m.sup.2] in a non-speculative area. Home buyers who fulfill these requirements will be able to use the loan facilities to the amount of up to 200 million won at the annual interest rate of 5.2 percent.

2) Lowered home acquisition tax

The real estate acquisition tax is halved, and the new rate will be effective until the end of 2011. The acquisition tax on houses worth less than 900 million won is lowered from 2.0 percent to 1.0 percent, while houses worth more than 900 million won from 4.0 percent to 2.0 percent. In addition, individuals who own more than one house are subject to pay a lower tax rate from 4.0 percent to 2.0 percent.

Meanwhile, the government decided to indemnify local governments against tax cut losses, and the actual indemnity plans will be discussed in a task force team meeting.

3) No more price ceiling on new homes

To encourage private builders to supply more homes, the government is pursuing easing of price ceiling on new homes as soon as possible. The related bill is pending approval in the National Assembly.
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Title Annotation:Policy Issues
Publication:Economic Bulletin (Korea)
Date:Apr 1, 2011
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