Move shows govt won’t let property market slump further: analyst

(SEOUL) South Korea will ease mortgage lending rules and extend tax breaks to encourage buyers back to the property market after home sales slumped to the lowest level in almost a year and a half. Shares of builders and banks surged.

Banks will be allowed to ease restrictions on mortgage loans for first-home buyers and owners of one residence until the end of March, the government said in an e-mailed statement on Sunday. The waiver for taxes on home sales will be extended by two years until the end of 2012, the government said.

The measures are the government’s second effort in four months to revive the market, after a programme to buy unsold houses failed to spur property transactions.

The number of homes sold dropped 7.3 per cent from a year earlier in the first seven months of 2010, and the number of transactions in July was the lowest since February 2009, according to statistics compiled by the land ministry.

‘The government’s measures were stronger than the market expected,’ said Hwang Seok Kyu, a banking industry analyst at Kyobo Securities Co in Seoul. ‘It’s a strong signal that the government won’t let the property market slump further.’

An index measuring 36 construction companies rose 1.4 per cent at the 3 pm close in Seoul trading, led by Daelim Industrial Co, which gained 5.7 per cent to close at 76,600 won.

KB Financial Group Inc, owner of South Korea’s largest lender, rose 3.1 per cent, while Woori Finance Holdings Co climbed 4.2 percent.

Banks can extend as much as 50 per cent of a borrower’s annual income for purchases of homes in Seoul and 60 per cent for areas outside the capital under the so-called debt-to-income limit.

That cap will be temporarily scrapped for buyers of homes, excluding those in three so-called ‘speculative zones’ in Seoul, according to the statement on Sunday by the Ministry of Strategy and Finance, the Financial Services Commission and the Ministry of Land, Transport and Marine Affairs.

‘The measures will help those in the middle class or lower buy homes at a time when the housing prices are stabilising,’ the government said in the statement. The temporary easing of lending rules won’t hurt lenders’ asset quality, according to the government.

The measures may have little impact on boosting the market while the central bank is poised to raise interest rates, because potential borrowers will be wary of rising debt, said Kim Jae Eun, an economist at Hyundai Securities Co in Seoul.

‘This is just sending inconsistent policy signals to the market,’ Mr Kim said.

The Bank of Korea increased its benchmark interest rate to 2.25 per cent from a record-low 2 per cent in July, and signalled more hikes.

The construction industry had its biggest contraction since at least 2008 in the second quarter, according to July data by the Bank of Korea.

Construction shrank 0.8 per cent over the three months through June, the third drop in four quarters. The decline contrasts with 1.5 per cent growth in South Korea’s gross domestic product.

Combined second-quarter profit at local lenders including Kookmin Bank, South Korea’s largest, plunged 34 per cent from a year earlier after they set aside extra loan-loss reserves to help construction and shipbuilding companies restructure debts, the Financial Supervisory Service said on Aug 3.

Raising the mortgage lending ceiling probably won’t lead to an ‘explosive’ increase in banks’ lending to households, Haekyu Chang, a Seoul-based analyst at Fitch Ratings Ltd, said in a phone interview before the government’s announcement. It also won’t erode the quality of loans, he said.

‘The household debt issue can only become a concern in the very long term if it rises rapidly,’ Mr Chang said. ‘I don’t see that happening in the next one or two years.’ – Bloomberg

Source: Business Times, 31 Aug 2010