Domestic financial and currency authorities emphasized the need to improve real estate lending policies to break the cycle of rising household debt. As a specific measure, they proposed a 'shared equity mortgage' system, where individuals share equity with the government when purchasing dwellings.

Bank of Korea Governor Lee Chang-yong, Financial Services Commission Chairperson Kim Byung-hwan, and Financial Supervisory Service (FSS) Commissioner Lee Bok-hyun attended a conference titled 'Real Estate Credit Concentration: Status, Issues, and Improvement Measures' held on the 3rd at the Bank Association building in Myeong-dong, Seoul, where they conducted a special discussion on real estate finance.

◇ 'Concerns over Korea's long-term low growth related to real estate issues'

They pointed out that the current problems in the real estate market are serious. Governor Lee stated, 'It has become difficult to implement currency policy without resolving the real estate issue,' adding, 'If we lower interest rates, financial supply will be concentrated on real estate, hindering the growth of new industries and making it difficult to achieve financial stability.'

Chairman Kim Byeong-hwan of the Financial Services Commission is speaking at a special conversation at the Korean Bank-Financial Research Institute joint policy conference held at the Bank Hall in Seoul on Nov. 3. From left are Lee Hang-yong, director of the Financial Research Institute, Lee Chang-yong, governor of the Bank of Korea, Chairman Kim Byeong-hwan, and Lee Bok-hyun, head of the Financial Supervisory Service. /Courtesy of News1

Chairperson Kim Byung-hwan noted that there are issues on both the demand and supply sides. Regarding the supply side, he stated, 'The feasibility assessment function of private financial institutions is too weak,' mentioning that with project financing (PF) loans that have recently caused issues, financial institutions did not assess feasibility, leading to over-supply during good economic times and a complete stall during downturns.

Regarding the demand side, he indicated that policy loans for vulnerable groups are causing side effects that increase household debt. Chairperson Kim remarked, 'Policy finance has primarily been utilized to assist non-homeowners in acquiring their own dwellings, but the scale has recently increased rapidly,' and said, 'While support for vulnerable groups is necessary, it is time to consider whether this approach is desirable from an overall macroeconomic stability perspective.'

◇ Kim Byung-hwan proposes 'shared equity mortgage'... 'Possibility to convert liability to equity'

The heads of the currency and financial authorities emphasized that to solve the real estate concentration phenomenon, the public sector's role in the lending supply sector must be expanded. As a specific method, Chairperson Kim proposed a 'shared equity mortgage' where individuals purchase dwellings with the government and share equity.

A shared equity mortgage is a policy financing product where the Housing Finance Corporation provides low-interest loans to individuals who are struggling to buy dwellings in exchange for equity. By utilizing this, the risks of falling home prices can be shared with the public sector, and profits can be gained if home prices rise.

Governor Lee Chang-yong of the Bank of Korea is speaking at a special conversation at the Korean Bank-Financial Research Institute joint policy conference held at the Bank Hall in Seoul on Nov. 3. /Courtesy of News1

Chairperson Kim stated, 'Those who cannot afford to buy a home have to live in rented housing, and they cannot share in the increase when housing prices rise, resulting in widening asset gaps,' adding, 'However, using a shared equity mortgage allows individuals to reduce liability burdens and is desirable from the perspective of macroeconomic stability management.'

Chairperson Kim said, 'We will first conduct a test on a trial basis and assess market demand to consider specific implementation methods,' and noted, 'Depending on the response, we will decide whether to expand the scale of the policy further or push for structural transformations.' He added, 'We will announce a specific roadmap by June.'

Governor Lee also agreed with Chairperson Kim's assertion, stating, 'The main reason for the high demand for dwellings in our country is that real estate is the best product for leveraged investment,' and he argued, 'To solve this issue, we need to shift the funding method from liability to securing equity to share risks and revenues.'

Meanwhile, FSS Commissioner Lee Bok-hyun noted that the risk weight (RW) for real estate should be adjusted to alleviate the concentration of real estate loans. He stated, 'It is doubtful whether the 15% risk weight imposed on residential real estate is appropriate considering the situation in Korea,' adding, 'In Hong Kong, a 25% risk weight is applied, adhering to international standards while adapting to local circumstances. We need to adjust risk weights so that financial institutions' decision-making aligns with the government's policy direction.'