Clumsy government intervention generates confusion

"It seems like the Ministry of Land, Infrastructure, and Transport officials have never bought a house before," said a bank official, when confusion arose regarding the Didimdol loan, a policy loan for low-income households last month. The confusion, where the policy loan limit was reduced, then reinstated within days, and is now expected to decrease again in the metropolitan area, is largely a situation brought about by the government itself.

Firstly, there was a lack of consideration for actual homebuyers. Those trying to buy a home typically look into loans first to estimate their available funds. However, on Oct. 14, KB Kookmin Bank suddenly reduced the Didimdol loan limit by over 20% from 250 million won. By applying the "room deduction," which excludes the landlord's priority reimbursement funds from the loan, the loan amount in Seoul was cut by 55 million won. The other four of the five major banks also planned to apply this from Oct. 21. Such a significant reduction in loan limits being introduced abruptly without prior announcement or guidance is unusual.

Afterward, the approach became inconsistent. When it became known that the loan limits were reduced, triggering backlash from actual homebuyers, the Housing and Urban Guarantee Corporation (HUG), an agency under the Ministry of Land, Infrastructure, and Transport, asked Kookmin Bank on Oct. 17 to delay the implementation date to Oct. 21. On Oct. 18, they requested all five major banks to postpone the implementation plan set for Oct. 21. It seemed the confusion would end with this, but on Oct. 23, the direction changed again. On Oct. 23, the Ministry of Land, Infrastructure, and Transport announced that “it is a minimum necessary measure to refrain from excessive lending practices or any lending that could strain the stability of the Housing and Urban Fund,” announcing their stance on loan reduction. Banks and actual homebuyers were left uncertain about which direction to follow.

The Ministry of Land, Infrastructure, and Transport has also sent signals to the market that could lead to misunderstandings. At a press conference on Sep. 9, Minister Park Sang-woo said, "There aren’t many homes in popular areas that can be purchased with policy loans, so it’s hard to see policy funds as the direct cause of housing price increases. We will try not to interfere with the goals of policy mortgages as much as possible." This statement was interpreted to mean that the government would not tighten policy loans. However, according to financial industry sources, the ministry had already verbally requested banks through the HUG to reduce the Didimdol loan limit from early September, even before this press conference. This revealed a discrepancy between their words and actions.

Is it true that policy loans have no impact on housing prices? Not exactly. The maximum home price that can be purchased with the Didimdol loan is 500 million won for a general loan, 600 million won for a loan for newlyweds, and 900 million won for a special loan for families with newborns. When someone uses a policy loan to buy a home on the outskirts of Seoul or the metropolitan area, the seller typically uses the funds to upgrade to a bigger or more centrally located property in Seoul. In a chain reaction, this process ultimately pushes up prices in popular areas.

From January to September this year, the amount disbursed for the Didimdol loan reached 22.2507 trillion won. This is six times the amount in 2022 (3.7205 trillion won) and has already far exceeded last year’s total (13.8834 trillion won). Loans with relaxed criteria for housing prices and income requirements—targeted at newlyweds, first-time homebuyers, and newborn special loans—account for more than half, totaling 12.035 trillion won.

The Ministry of Land, Infrastructure, and Transport said that it "plans to announce tailored improvement measures for the Didimdol loan soon." The financial sector hopes that, rather than clumsily imitating the now-routine government intervention, the ministry will introduce responsible policies that take demand-side needs into account.