as the government rolls out a series of strongreal estate measuresto stabilize the housing market, everyone from homebuyers to investors are being forced to revise their financing plans. The 10-15 Plan is the third in a series of measures, following the 6-27 Lending Regulation and the 9-7 Supply Plan, and it heralds intense changes, especially in terms of financial regulations and regulated areas.
this report analyzes the key points of the newly tightenedlending regulationsand provides concrete examples of how they will affect your lending limits and funding strategy.
1. massive expansion of regulated areas: Seoul and 12 gyeonggi provinces, and why?
the most noticeable change in the real estate measuresis the explosion in the scope of regulated areas. in addition to the four previously regulated boroughs of Gangnam, Seocho, Songpa, and Yongsan, all 21 boroughs of Seoul have been newly designated as regulated areas (Adjustment Target Areas and Speculative Overheating Zones)
this also includes 12 major districts in Gyeonggi-do, including Gwacheon, Gwangmyeong, Seongnam (Bundang-gu, Sujeong-gu, Jungwon-gu), Suwon (Yeongtong-gu, Jangan-gu, Paldal-gu), Anyang-dong, Yongin-su, Uiwang-si, and Hanam-si. This brings most of the metropolitan area under the strong regulatory umbrella of speculative overheating zones or areas subject to adjustment.
1.1. 40% LTV Era Begins: Only the Cash Rich Can Buy?
this expansion of regulated areas means that loan-to-value ratios (LTVs) will be significantly lower than before. in the newly regulated areas, LTVs will be reduced to 40% in one fell swoop. this means that when you buy a home, you can only borrow up to 40% of the house price from a financial institution.
this has a huge impact on your financing plans. for example, if you want to buy an apartment that costs 1 billion won in the market, you will have to have at least 600 million won (60% of the house price) in cash to be able to buy it. with these draconian measures, the financial authorities have made it clear that even the poor and middle class should buy homes with "debt they can afford. in other words, they are determined to fundamentally block speculative demand that utilizes leverage (loans).
however, the policy of allowing 70% LTV for first-time homebuyers has been maintained to protect real consumers. on the other hand, after the tightening of the regulations, controversy arose over the issue of loan-to-value (LTV) loans being subject to the 40% LTV rule, leading the Financial Services Commission to amend the guidelines to allow 70% for loan-to-value loans as an exception.
Table 1: Comparison of loan-to-value (LTV) changes in key regulated jurisdictions
categoryrevised Regulatory LTV (Regions)minimum cash required by real buyers to purchase 1 billion apartmentspolicy intent conventional buyers 40 kRW 600 million prevent leveraging, curb speculative demand first-time homebuyers 70% (maintained) kRW 300 million minimize protection of real consumers
1.2. Effect of simultaneous designation of land transaction permit zones to curb speculation
along with the expansion of the regulated area, the Land Transaction Permit Zone (Toheo Zone) was also expanded to the same area as the Speculative Overheating Zone. this system restricts real estate transactions to prevent real estate speculation, and once designated, home buyers and sellers must obtain permission from the local governor.
the key is that the permit comes with a live-in obligation. in particular, the government has designated apartments in the regulated area as well as townhouses and multi-family houses in the same complex as a land transaction permit zone. This strong regulatory combination is the most effective way to close "gap investment". in the toehold zone, it is impossible to obtain a permit to sell a home with a lease, which prevents people from buying a home with a lease.
this three-dimensional combination of "financial regulation (40% LTV)" and "transaction regulation (live-in residency obligation)" doubly blocks speculative demand, but the result is a sharp contraction in transactions. immediately after the announcement of the measures, the market experienced a "locked-in" phenomenon where the number of listings plummeted, which can reduce transaction market liquidity and lead to long-term market inefficiencies.
2. financial regulation three-step combo: further tightening the lending purse strings
the government has announced an additional set of tougher financial regulations that will reduce lending limits to curb housing demand.
2.1. Differentiating loan limits by house price: a financing strategy for houses over 2.5 billion
previously, the mortgage loan limit in metropolitan areas and regulated areas was KRW 600 million regardless of market value, but the real estate measuresfurther refine and reduce the loan limit based on home price.
homes valued at 1.5 billion won or less: 600 million won, the same as now.
homes valued between KRW 1.5 billion and KRW 2.5 billion: Reduced to KRW 400 million.
homes over KRW 2.5 billion: significantly reduced to 200 million won.
this measure severely limits leverage in the ultra-high-priced housing market, and means that purchasing a home worth more than KRW 2.5 billion will require almost all cash. this is a strong signal to control even the utilization of debt by high net worth individuals.
2.2. Impact of applying a stressed DSR of 3.0%: Analyzing the case of the limit change for those earning 100 million won per year
the stress rate will be adjusted to 3.0% from 1.5% for mortgages in metropolitan and regulated areas. the stressed rate is a hypothetical interest rate that more conservatively calculates a borrower's debt service coverage ratio (DSR) to reflect the likelihood of future interest rate increases.
if the stress rate increases to 3.0%, the interest on the loan is calculated to be higher, effectively reducing the principal amount that the borrower can borrow, or the borrowing limit. for example, a borrower with an annual income of 100 million won ($100,000) who takes out a home equity loan would expect their loan limit to be reduced by about 15 percent, which translates to a reduction of about 20 million won. for a borrower with an annual income of 60 million won, a reduction of about 12 million won is simulated.
this stress DSR will be extended to virtually all household loans, including credit loans and negative passbooks, in addition to mortgages, so all borrowers will need to manage their total debt repayment capacity much more strictly than before.
related: Wondering about the DSR rule? A breakdown of the key criteria that determine your borrowing limit
2.3. 1Closing the homeowner 'gap investment' gap: rental loans are now DSR-bound too
the government has addressed the gap investment avenue for first-time buyers by excluding subletting from the existing DSR rules. The real estatemeasures allow first-time buyers to count interest paymentson subletting loans towards their DSR if they take out a charter loan in metropolitan and regulated areas.
DSR is the ratio of an individual's principal repayments of all debts owed in a year divided by their annual income, which is usually limited by banks to no more than 40%. Until now, only interest, not principal, has been reflected in DSR, as sub-rental loans are repaid by returning the deposit at maturity.
however, for first-time homebuyers who already have a mortgage and are close to the DSR limit, adding the interest from a sublease to their DSR would push their total debt-to-income ratio over 40%, significantly reducing their ability to take out additional loans. this effectively prevents first-time buyers from buying a new home with a mortgage rather than selling their existing home (gap investing). the government is using the DSR as a "policy valve" to shut off certain speculative behaviors, rather than just controlling the total amount of debt.
3. real-world analysis: How to protect your homeownership dreams amidst regulation
let's take a look at some real-world examples of how stricter lendingrules are impacting real borrowers.
3.1. Case 1: A middle-class borrower who couldn't secure the loan she wanted due to a stressed DSR
mr. Kim Mo, an office worker with an annual income of 80 million won, wanted to buy an apartment in Suwon, Gyeonggi-do, which was recently designated as a newly regulated area. With an LTV of 40%, she expected to be able to borrow up to KRW360 million, but the newly applied stress DSR of 3.0% reduced her expected loan limit by more than KRW30 million.
with a lower loan limit than he wanted, Kim tried to make up the difference with a credit line, but he was limited by the fact that the stress DSR affects not only his mortgage but also his credit underwriting. the stressed DSR is especially unfavorable for borrowers who borrow during periods of rising interest rates, so it's essential to plan your finances based on a DSR that reflects a conservative 3.0% stressed rate, rather than the expected rate. You should also pay close attention to managing your existing credit lines and negative equity.
3.2. Example 2: Single homeowner is mistaken for a gap investor while looking to move
ms. Mo Park, an existing homeowner, needed to move to a different apartment in a regulated area due to a job transfer. she had a high mortgage interest rate on her existing home, and as theinterest payments on her new loan would be added to her DSR, her borrowing limit would be drastically reduced, making it difficult for her to finance the move.
while this regulation is aimed at preventing gap investments, it may also affect the ability of single-family homeowners to move their homes. it is important for single-family homeowners to take a strategic approach to loan counseling, clearly demonstrating the purpose of their residence, such as movingrather than selling, and choosing a loan product with favorable terms when calculating DSR.
4. market reaction and government commitments: How credible are supply measures?
4.1. Market 'lock-ups' and increased deeds of gift after tightening regulations
strong demand curbs are dampening buying sentiment in the market in the short term. the problem is that at the same time as buying sentiment is dampening, there is a growing "locked-in" phenomenon, where even listings for sale disappear from the market. this is because homeowners are more inclined to hold off on selling amid uncertainty, or to gift to avoid capital gains taxes.
while this state of transaction disconnect, where transactions plummet and listings disappear, can put downward pressure on home prices in the short term, it poses risks in the long term. experts say that if strong demand suppression measures are combined with a lack of supply, it could increase market inefficiencies and pave the way for sharp price increases in the future.
4.2. 1.35 million housing units in the metropolitan area: market expectations and distrust in a race to the bottom
the government has promised to speed up various legislative initiatives and housing starts in order to fulfill its plan to supply a total of 1.35 million housing units (270,000 units per year) in the Seoul metropolitan area over the next five years, announced in September.
currently, the housing market is in dire need of supply, with the number of apartment units scheduled to be delivered nationwide expected to plummet next year, despite strong demand curbing measures.the government is faced with a policy dilemma in which it must simultaneously address two conflicting challenges: curbing demand in the short term and ensuring supply in the medium to long term.
the market believes that the government needs to speed up legislation on key supply stimulus bills, such as the repeal of the reconstruction excess profits clawback, as well as enforcing stronger lending regulations, to gain credibility for its policies.the effectiveness of the policy will depend not on short-term demand suppression signals, but on the pace of reforms that instill confidence in the public that a sustainable housing market stabilization system will work five and ten years from now.
5. frequently Asked Questions (FAQs)
Q1. Are first-time home buyers subject to the 40% LTV rule?
A. No, first-time buyers will continue to be subject to the 70% LTV rule. this is an exception to protect real buyers. however, they must still comply with other conditions, such as the residency obligation imposed when using a main mortgage in a regulated area.
Q2. Does the DSR for a single-family loan include the principal amount?
A. No. For a single-family sublease, only the "interest payments" are included as debt in the DSR calculation, not the principal. this is because the security deposit is repaid by the landlord at maturity, so there is no principal repayment burden. However, the interest alone can significantly reduce the borrowing limit for existing mortgage holders.
Q3. If a stressed DSR is applied, will my actual loan interest rate increase by 3.0%?
A. No. The stressed rate is a hypothetical interest rate that is only applied to assess a borrower's ability to repay the loan and "cap the loan" by assuming a possible future increase in interest rates. There is no change to the interest rate that would apply to the actual loan contract. The effect of the higher hypothetical rate is to reduce the amount of principal the borrower can ultimately borrow.
Q4. What is the physical residency requirement for a primary mortgage in a regulated area?
A. If you use a home equity line of credit for the purpose of purchasing a home in a regulated area, you will be subject to a physical presence requirement. in speculative overheating zones, you must move in within two years and live there for at least one year, and in adjustment target areas, you must move in within two years and live there for at least six months. failure to comply with these obligations is a fatal penalty that allows the bank to immediately recover the full amount of the loan on the grounds of breach of the loan agreement.
6. conclusion and CTA: How to build a real estate strategy amidst the chaos
the real estate measuresare the culmination of a "super-strong demand curb" of regulation and LTV/DSR tightening across Seoul. the government hopes to stabilize the housing marketby severely limiting leverage and doubly cutting off gap investment routes. Home purchases now require overwhelming cash reserves rather than reliance on loans, and all loan plans must pass through a wall of stressed DSRs.
most important is the 'speed' of the policy. keeping a close eye on the pace of implementation of the government's promised housing supply measures and the progress of legislation, along with thorough preparation for financial regulation, is the smart way to navigate the housing market in 202X. Is your financial plan safe amidst this complex regulatory change? share your thoughts in the comments! Subscribe to never miss our next expert analysis.