Reduction in Mortgage Limits Starting September: Will It Curb Soaring Apartment Prices in Seoul?

In response to skyrocketing apartment prices in Seoul, the government plans to reduce mortgage limits starting next month.

In response to skyrocketing apartment prices in Seoul, the government plans to reduce mortgage limits starting next month. This new regulation aims to cool down the housing market, but experts believe it might not be sufficient. While transaction volumes are expected to decrease and gap investment may become more challenging, experts predict that apartment prices may continue to rise, and rent prices might soar further.

The South Korean government is implementing stricter mortgage limits starting in September to address the rapidly increasing apartment prices in Seoul. This move is part of a broader effort to stabilize the housing market, which has seen a significant surge in prices.

Key Changes in Mortgage Limits

From September 1, the Financial Services Commission will introduce a second stage of the debt-to-service ratio (DSR) system. Under this new rule, homebuyers in the metropolitan area will face higher interest rates and stricter loan limits due to additional stress premiums. For instance, a borrower with an annual income of 50 million won might see their mortgage limit reduced by approximately 42 million won, while those earning 100 million won could face a reduction of around 84 million won.

Market Impact and Expert Opinions

Despite the implementation of these new regulations, there are concerns about their effectiveness. The current market sentiment suggests that the measures may not significantly affect the buying behavior of those looking for "one solid property" in desirable locations. Furthermore, if the U.S. Federal Reserve reduces interest rates later this year, it could offset the impact of South Korea’s tighter mortgage rules. This could result in a shift from home buying to renting, potentially driving up rent prices and destabilizing the housing market further.

According to KB Real Estate's weekly report, apartment prices in Seoul have already risen by 0.22% in the past week. The housing market has been overheating, with transaction volumes surpassing last year’s totals by a significant margin.

Future Outlook

Experts have mixed opinions on the effectiveness of the new measures. Shinhan Bank’s real estate expert, Kwon Yong-sun, believes that the stress DSR will likely reduce the number of transactions, but he notes that the impact on high-demand areas like Gangnam may be minimal. On the other hand, Korean Construction Industry Research Institute’s Kim Seong-hwan points out that potential buyers might struggle with reduced loan limits, making it difficult for them to proceed with gap investments.

NH Nonghyup Bank’s real estate expert, Kim Hyo-sun, predicts that the reduction in mortgage limits might be offset if the Fed cuts rates and the Bank of Korea follows suit. This could mitigate the intended effects of the stress DSR on apartment prices.

There is also a possibility that the new regulations could lead to a rise in rent prices. Kim Hyo-sun warns that if prospective buyers shift to renting due to stricter mortgage rules, this could increase demand for rental properties and drive up rents even further. Similarly, Sogang University’s Professor Kwon Dae-jung believes that the current supply shortage and concentration of demand in certain apartment markets could mean that price increases and rent hikes may continue despite the new regulations.

The introduction of tighter mortgage limits aims to stabilize Seoul’s overheated housing market. However, given the complexities of the market and potential external factors such as interest rate changes, the effectiveness of these measures remains uncertain. The potential shift from buying to renting could further complicate the situation, leading to higher rent prices and continued pressure on the housing market.