Private Rental Market in Korea

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Gazette

1. Introduction

P

rivate rental markets in Korea have experienced dramatic changes recently.

While chonsei, Korea’s unique lease system that provides an immediate large lump sum deposit to landlords, has been losing its dominant share in the private rental market, it has been difficult to see and scrutinize a detailed picture of the changing rental market landscape due to the unavailability of data. However, the Korean government has implemented lease contract reporting system since 2011, which has made analyzing the changing landscape of private rental market conditions possible by using the total population of lease contract reporting data, which include over a million units every year.

This study is the first attempt to depict the landscape of private rental market changes from 2011 to 2014 using the whole population of lease contract data. The author aims to analyze the trend of changing rental tenure types, to provide the characteristics of the private rental market by deposit amount, housing type, and age group, and finally to suggest policy implications for low-income renters.

The structure of this paper is as follows: the paper first explains chonsei, the unique rental tenure type in Korea, followed by its changing share in the private rental market. In addition, it illustrates several factors related to recent market changes. Next, the paper presents a detailed analysis on the characteristics of private rental market transactions in terms of transaction volume, deposit amount, housing type, and age group. Finally, based on the analysis, this paper provides several policy implications that would serve vulnerable renters, especially those living on a monthly rent with deposit (MRD hereafter).

Changing Landscape of

Private Rental Market in Korea

Park Miseon

SPACE &

ENVIRONMENT

Space & Environment is a quarterly magazine published by KRIHS. Its purpose is to introduce current issues on territorial planning in Korea and disseminate research achievements and international activities of KRIHS and other Korean institutes.

KRIHS (Korea Research Institute for Human Settlements) was established in 1978 with a mission of creating a beautiful and pleasant living environment. To achieve the mission, KRIHS has been committed to enhancing the quality of life and well-being of the people in the nation with its spatial planning studies and policy suggestions.

Since its foundation, KRIHS has carried out a variety of studies on the efficient use, development, and conservation of territorial resources. Its research areas range from sustainable and balanced territorial development and conservation of the territory to the provision of housing and infrastructure.

ISSUES & TRENDS Changing Landscape of

Private Rental Market in Korea 01 An Analysis on the Economic Impacts of Changes in Property Tax 06 Developing Housing Finance Policy in a Changing Housing Market 11

IN-DEPTH LOOK

2014 KRIHS Research Projects 16 GLOBAL PARTNERSHIP NEWS 19

ISSUES & TRENDS 01

Vol. 62 July 2015

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2. Characteristics of private rental market transaction Transition from chonsei to MRD

Analysis indicates that recent chonsei contracts are tending to decrease, while recent MRD leases are increasing. During the past four years from 2011 to 2014, chonsei decreased its share of transactions from 67 percent in 2011 to 59 percent in 2014, while MRD share for the same period rose from 33 percent to 41 percent. The total volume of private rental transactions amounted to 1.3 million units in 2011 and increased to over 1.4 million units in 2014. Therefore, the tendency trends toward more households entering into the private rental market and living in MRD than into chonsei contracts.

However, the degree of shifting share differs by region. Figure 1 below shows the spatial differences of chonsei transactions between the two years preceding 2013 and 2014, respectively. Regions close to Seoul and vicinity metropolitan areas located in the northeast region of the Korean peninsula have experienced a sharp decrease in their share of chonsei transactions, while the southeast regions of the country have also experienced the fall of chonsei leases to a lesser degree even though these areas are already predominant in MRD lease contracts. Indeed, the MRD has gained share during the same period. The opposite is true for the MRD shares in the private rental markets.

Table 1. Rental contract transaction volume and share of tenure type from 2011 to 2014

Year 2011 2012 2013 2014

Total rental contracts [thousand units] 1,321 1,324 1,373 1,467

Share of chonsei contract [%] 67.0 66.0 60.6 59.0

Share of MRD contract [%] 33.0 34.0 39.4 41.0

Source Ministry of Land, Infrastructure, and Transportation

(MOLIT), Lease contract data (2011–2014)

Source MOLIT, Lease contract data (2011–2014)

Figure 1. Spatial difference of chonsei and MRD transactions by region from 2011 to 2014

2011-2013 2012-2014

chonsei

MRD

Note Blue depicts chonsei transactions and red depicts MRD transactions. The darker the colors, the more concentration of transactions in each region.

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Characteristics of rental market changes in detail

In terms of deposit amount, the number of chonsei transactions that require a small deposit have decreased, while chonsei contracts with expensive deposits such as over $300,000 (U.S. dollars) have been on the rise. The share of chonsei contracts of less than $50,000 declined from 27 percent in 2011 to 19 percent in 2014, while the proportion of expensive chonsei that required more than $300,000 rose from 4 percent in 2011 to 10 percent in 2014. In Seoul, almost a quarter of chonsei contracts required a deposit of more than $300,000 in 2014. As a result, affordable chonsei units have decreased substantially. Table 2 below shows the annual proportion of each deposit category and its change over time. Chonsei with a relatively small deposit below $50,000 has decreased its share by 30 percent for the past four years, while expensive chonsei over $300,000 has increased by 150 percent In effect, such a sharp contrast can be summarized as decreasingly affordable chonsei and increasingly expensive chonsei.

More interestingly, this phenomenon shows locational differentiation by deposit amount. Even though affordable chonsei transactions have decreased and expensive ones have increased as a whole, the gain or loss depends on location. Kernel density analysis reveals that places where affordable chonsei transactions decreased and concentrated are illustrated as dark green in Figure 2 below. Red depicts the places where tenants have more chances to find chonsei units with a deposit in the same amount compared to that of the last two years, i.e., 2011–2012 and 2013–2014, at the end of the rental contract. The darker the area, the more concentrated chonsei units with the same amount of required deposit. Therefore, increasingly expensive chonsei units have become highly localized, which is also the case for decreasingly affordable chonsei. This change implies a localized housing policy for housing sub- region regardless of administrative boundaries.

Table 2. Share of chonsei contract by deposit amount (%)

Deposit range

(unit: 1,000 US dollars) 2011 2012 2013 2014 2011–2014

changes

Less than U.S. 50,000 27 24 24 19 -30

50,000 – 100,000 30 29 28 25 -17

100,000 – 200,000 29 31 30 31 7

200,000 – 300,000 9 11 14 14 56

Over 300,000 4 5 7 10 150 Source

MOLIT, Lease contract data (2011–2014)

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Figure 2. Changes to chonsei deposit amount by location

Deposit below U.S.$50K Deposit over U.S.$300K

Source MOLIT, Lease contract data (2011–2014)

MRD is a type of rental contract requiring some amount of deposit and a monthly payment. The MRD shares 41 percent of total private rental transactions in Korea as of the end of 2014. In terms of deposit amount, the MRD is quite different from chonsei. Most MRDs require less than $50,000 for deposit, which claimed an 82 percent share of total MRD from 2011 to 2014. On the other hand, chonsei transactions of less than $50,000 deposit were only 25 percent of total transactions.

The most prevalent type of chonsei deposit range is between $100,000 and

$200,000.

Over the last four years, MRD contracts requiring small amount of deposit has increased dramatically. Most of the MRD transaction increase is attributable to a deposit range less than $20,000, especially less than $10,000. The issue that arises here is that small amount-deposit-MRD is more likely to require more monthly rent than MRD requiring large amount of deposit. This implies that it would be more burdensome for those who have trouble scraping together the deposit, which indicates that they have few assets and financial resources. Unfortunately, this is the typical picture faced by both newcomers to private rental markets and existing tenants renewing rental contracts.

One of the interesting findings the lease contract data shows is the generation gap in the rental housing market. While young adults have been entering the rental housing market at a growing pace, a huge gap exists between those living in chonsei and those in MRD. Young households living in chonsei usually have a higher deposit

Table 3. Differences in deposit amounts between chonsei and MRD(%)

Deposit amount

(unit: 1,000 US dollars) chonsei MRD

Less than 50,000 25 82

50,000 –100,000 29 12

100,000 –200,000 30 4

Over 200,000 17 1

Note Green colors indicate areas where transactions of units decreased compared to two years ago. Red colors are areas where transactions of units increased. The darker the color, the more concentrated the same amount of chonsei units.

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and enjoy a better residential environment and housing quality as well. Considering their age of under 30, a questionable economic situation, and uncertain job security as a whole, their deposit is likely to be transferred from their parents’ generation. This reflects increasing concerns over not only the present inter-generational gap but also a future intra-generational gap in the under-30 group’s credibility as potential and sustainable owner-occupiers.

Table 4. MRD contract by age group

Age group 20–29 30–39 40–49 50–59 60–

MRD (%)

Korea 56 34 39 38 35

Seoul 62 32 34 34 32 Source

Source

3. Implications and policy recommendations

Over the past four years housing rental market conditions have changed dramatically.

The prevalent type of rental contract has shifted from chonsei to MRD. There are growing concerns over the housing cost burden for low-income renters, especially those living in a month-to-month rental contract. Notwithstanding, low-income renters in the private rental housing market have been hardly the first priority of policy consideration.

This study analyzed the trends and characteristics of recent private rental market changes by adopting spatial analysis tools. Based on the findings, the research aims to provide pragmatic and targeted policy recommendations responding to rental market change that contribute to relieving the severe rent burden on low-income households. This study recommends that the focus of housing policy change from chonsei to MRD. Further, policy makers should consider various aspects of the rental situation such as the range of the required deposit, age group, localities, life cycle, and household income.

Tailored strategies should be put into place to respond to changing characteristics of the rental market. This study proposes five categories of policy recommendations that take the following factors into account: i) rental type (chonsei vs. MRD), ii) income level (focused on low-income households), iii) affordable rental units for the underprivileged, iv) stage of life cycle, and v) local uniqueness. Finally, responding to

Table 5. Gap in deposit amount by housing type

Average deposit amount (U.S. dollars) 20–29 age group All age groups

Chonsei deposit

Apartment (a) 123K 170K

Other type (b) 61K 65K

Ratio (a/b) 2.0 2.6

MRD deposit

Apartment (a) 29K 30K

Other type (b) 18K 13K

Ratio (a/b) 1.6 3.0

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rental housing market change, the author recommends introducing the following policy measures to relieve the rent burden for low-income households:

•consider shifting policy focus from chonsei to MRD;

•develop a deposit accumulation account program for low-income MRD households;

•create a government-sponsored deposit guarantee program;

•institute a lump-sum rent discount program backed by a government loan;

•provide discount interest rates for families raising children;

•construct an emergent rent subsidy for vulnerable households; and

•offer a temporary housing rent subsidy for young adults in their 20s.

This is a summary of the research paper of A Study on Customized Policy Measures Addressing Low-income Renters’ Housing Cost Burden Responding to Rental Market Change. The study was awarded as the Best Research of the Year in 2014 by the National Research Council for Economics, Humanities and Social Sciences. This study can be found at KRIHS English Web site (http://eng.krihs.re.kr).

Park Miseon Associate Research Fellow, Korea Research Institute for Human Settlements mspark@krihs.re.kr

An Analysis on the Economic Impacts of Changes in Property Tax

Park Joon

ISSUES & TRENDS 02

1. Possibility for PNV reorganization and expected changes in property tax

T

he Korean government is considering overall reorganization of the Publicly Noticed Value of Real Estate Price (PNV) System using actual sales price. By reorganizing the system, it is expected that the ratio of PNV to actual sales price will rise leading to an upturn of the tax base and the amount of property tax since the PNV is used for calculating the tax base. Property tax is a major concern not only for households, but also for local public finance, the construction industry, and real estate industry. The purpose of this study is to estimate the changes to the

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property tax from the expected reform of the PNV system and analyze the economic impacts of the changes, which can contribute to policies for property tax and the PNV system.

2. Current property tax system in Korea

Property tax in Korea, is largely divided into two types: Property Tax and Gross Real Estate Tax.

Property Tax refers to local tax imposed on those who own land, buildings or houses. The widespread sources of Property Tax are considered reliable since real estate prices have gradually increased. The rates of Property Tax, a progressive tax, are set at around 0.07 - 0.4 percent of the tax base of each property. The Gross Real Estate Tax, also a progressive tax, was initiated in 2005. The purpose of this tax was to improve fairness of the tax burden, stabilize real estate prices, and facilitate balanced development of local finances and the nation’s economic growth by imposing tax on owners of high-priced real estate asset. When introduced in 2005, the Gross Real Estate Tax (a national tax) was designed to work as a policy of redistribution of wealth and control on real estate speculation whereas the Property Tax (a local tax) served the function of securing tax revenue for local governments. Gross Real Estate Tax rates range from 0.5 percent to 2 percent of the tax base of each property. Overall, the rates are set higher than those of the Property Tax. Furthermore, the Gross Real Estate Tax applies to each house and land across the nation and calculates the sum per person, which makes it subject to more aspects of the progressive tax than the Property Tax.

In 2012, the Property Tax revenue, amounted to 8.4 trillion won¹⁾ and the Gross Real Estate Tax revenue amounted to 1.2 trillion won, making the combined property tax imposed on real estate around 9.6 trillion won.

3. Financial impacts of changes in property tax

Impacts on households

In this section, the impacts of changes in property tax on houses and land, which are directly affected by the PNV system, are mainly analyzed based on the 2013 Korean National Household Panel Survey Data on Finance released by the Statistics Korea (KOSTAT). Of 9,269 research subjects, 6,236 households (67.6 percent of the total) were required to pay Property Tax, and their average Property Tax amount was estimated at 540,000 won per year. The number of households required to pay Gross Real Estate Tax was 211 (2.3 percent of the total), and their average tax amount was estimated at 1.70 million won per year.

Changes in tax burdens on households were analyzed on the assumption that an expected reform of the PNV system would raise the ratio of PNV to actual sales prices from the current level of 65 percent to 80–100 percent. The result showed that an average Property Tax amount for houses and land per household would increase from an annual 540,000 won to 680,000–880,000 won (26 to 63 percent increase).

1) U.S.$1 is approximately 1,100 Korean won as of July, 2015.

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Impacts on public finance

In 2012, the total nationwide tax base for Property Tax on houses and land was 2,447 trillion won, and according to this tax base, the total Property Tax amount on houses and land was 7.134 trillion won. The total nationwide tax base for Gross Real Estate Tax was 243 trillion won in 2012, and the total Gross Real Estate Tax amount was 1.369 trillion won.

Changes in tax revenues were analyzed on the assumption that an expected reform in the PNV system would raise the ratio of PNV to actual sales prices from the current level of 65 percent to 80–100 percent. The result showed that the amount of Property Tax for houses and land would range from 1.926 trillion to 4.566 trillion won, an increase of 27 to 64 percent. Gross Real Estate Tax would range from 851.4 billion to 2.383 trillion won, an increase of 62 to 174 percent.

If Property Tax increased, local governments’ rate of fiscal independence would improve by an average of 7.6 percent. By region, Seoul (33 percent), Incheon (12.1 percent) and Ulsan (11.6 percent) would see the greatest increase in the ratio.

Note Numbers in parentheses are percentage change (%).

Note Numbers in parentheses are percentage change(%).

The same method applied to Gross Real Estate Tax amount per existing taxpaying household would result in an increase from an annual 1.70 million won to 2.29–3.08 million won(35 to 81 percent increase). With new taxpaying households included, an average tax burden would increase from an annual 1.70 million won to 1.89–2.03 million (11 to 19 percent increase).

Table 2.Changes in tax revenues from property tax (unit: 100million won)

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4. Economic impacts of changes in property tax

Analysis with Computable General Equilibrium (CGE) Model

In this section, macroeconomic impacts were analyzed depending on a scenario of the ratio of PNV to actual sales price changing from the current level of 65 percent to 80 to 100 percent based on the statistics for local and national taxes, and on the Korean National Household Panel Survey Data on Finance. Furthermore, additional simulations were carried out under various scenarios that property tax rates were set differently on houses and land or that an increase in tax revenues by property tax was offset by exemptions for other types of tax.

The analysis gave the following results. First, the overall income level of households would rise due to government transfer incomes. However, in terms of consumption, households with high-priced assets would cut spending while households with medium/low-priced assets and those without assets would increase spending. Second, overall government tax revenues would increase while the amount of indirect tax would slightly decrease. Third, GDP in general would slightly decrease by 0.03–0.06 percent including a drop in the construction industry by 0.3–0.8 percent. On the other hand, if property tax were raised only for land except houses, a decrease in GDP would be scaled down to the level of 0.01 percent. If an increase in tax revenues by property tax were compensated for by exemptions for other types of tax, a decrease in GDP would be reduced down to the level of 0.02 percent.

Analysis with Structural Vector Autoregressive (SVAR) Model

In this analysis, the SVAR model was developed with the six variables of land prices, house prices, property tax, GDP, government spending, and private consumption.

Based on this model, impacts on variables caused by property tax changes were examined by using annual data from 1991 to 2012.

With an increase in property tax, the following three changes in other variables are expected: i) government spending would increase while house prices and land prices would decrease in the real estate market; ii) private consumption would likely first fall into negative figures but later turn to positive figures and continue to rise; and iii) GDP would show no sign of change at first but gradually increase.

5. Conclusion

If the expected reform of the PNV system elevates the tax base of the property tax, an estimated that 3.5–8.6 trillion Korean won increase will be seen in the Property Tax and other related taxes including the Gross Real Estate Tax. This increase of property tax would have a positive influence on local public finance under a worsening deficit due to the expansion of welfare expenditures and a decrease in acquisition tax revenue.

For households, the reform would lead to an increase of the tax base of the property tax and tax burden, which would reduce the disposable income of property owners and private consumption in the economy. The increase of property tax from

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the reform will also influence property prices, resulting in negative impacts on the economy such as decreased investment in the construction and real estate industries.

On the other hand, because the property tax is progressive, a reform resulting in an increased property tax would have positive effects such as redistribution of wealth and an increase in government tax revenues and spending leading to an expansion of overall consumption in the economy.

It is also notable that an increase in the property tax only on land excluding improvements such as housing, or a reduction of the consumption tax and value added tax in proportion to the increase of property tax has positive effects on GDP.

Drastic changes in the ratio of PNV to actual sales price would increase property tax burdens and negatively affect investment in the construction and real estate industries. Therefore it is necessary to implement a policy plan in which the PNV gradually matches the level of the actual sales price by stages in three to five years.

A tax reform from the reform of PNV system needs to be designed with a comprehensive consideration of local governments’ fiscal independence, the fiscal structure between central and local governments, the macro economic impacts from property tax changes, differentiation of tax rates on housing and land, and the strategic link of property tax to other taxes.

This article is a summary of the research paper An Analysis on Economic Impacts of Changes in Property Tax, which can be found at KRIHS English Web site (http://eng.

krihs.re.kr).

Park Joon Associate Research Fellow, Korea Research Institute for Human Settlements jpark@krihs.re.kr

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Developing Housing Finance Policy in a Changing Housing Market

Park Chungyu

ISSUES & TRENDS 03

1. Basic Elements of the housing finance system

Basic Elements of the housing finance system include maintaining macro and micro prudentiality in the housing finance market, increasing financial inclusion in the market and efficiency of housing finance, and ensuring consumer protection in the housing finance market, among others. The future housing finance system is required to be implemented based on a detailed analysis with these elements comprehensively taken into account. The purpose of this research is to propose policy directions by analyzing and reviewing these elements of the housing finance system.

2. Maintaining macro and micro prudentiality in the housing finance market

First, a stress test on the housing finance market was conducted to analyze prudentiality, or stability, in the housing finance market. According to the study result, consumer price index, market interest rates, GDP, and housing prices were identified as important stress factors. This finding suggests that it is crucial to control economic variables such as prices and interest rates and establish a base for sustainable economic growth in order to maintain prudentiality in the housing finance market.

The recent trend of gradual recovery in the housing market due to the policy efforts is considered a positive sign for establishing stability in the housing finance market.

And yet, the fact that the nation’s potential growth rates have continued to drop and household employment conditions have remained unstable is expected to have a negative impact on the housing financial market, so one must pay special attention to these issues.

Table 1. Stress test by scenario in the housing finance market (unit: %)

Category Baseline Housing

price index CD yield

rates Consumer price index GDP

(annual)

Scenario 15%

decline 5%p

increase 7%

increase 6%

decline

Average 0.65 2.95 1.85 0.96 1.11

Median 0.57 2.68 1.61 0.82 0.97

Difference from the certainty range (with median set as a baseline)

baseline:

0.81 +1.87 +0.80 +0.01 +0.16

Source

Park Chungyu et al., Developments in Financial Systems and Challenges for the Housing Sector (2014)

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Next, an analysis of delinquency decision factors was conducted by using micro data. The results indicated that delinquency rates increased if financial debts rose, but that an increase of security loan to total loan ratio led to a decrease in delinquency rates. An increase of the security loan to total loan ratio for residential purposes, in particular, had a relatively greater impact on reducing delinquency rates. Low-income families moved in the same direction; only the variable of the security loan to total loan ratio for residential purposes held statistical significance. This finding suggests that it is necessary to figure out specific purposes of mortgage loans, classify the loans according to groups, and manage and monitor the loans. When an analysis was conducted by age group, the ratio of mortgage loans by those under the age of 50, considered before their retirement, had more influence on reducing delinquency rates compared to the analysis of those over the age of 50. Those over the age of 50, considered retirees, showed the likelihood of their delinquency rates decreasing when loan ratio for purposes other than residential ones increased. This implies that securing incomes by investment in real estate for the sole purpose of investment is a crucial factor in determining whether delinquency takes place or not.

By using Value at risk (VaR), the critical level of proper LTV (loan to value) ratio, which can be considered a limit for safe collection of loans, was calculated. The proper LTV was estimated at 72.6–74.8 percent nationwide based on the price data for the past 20 years and at 76.8–77.7 percent nationwide based on the latest five years. Because the former estimation reflected the price collapse during the Asian financial crisis and the price jump in the early 2000s, it was assessed lower than the proper LTV for the latest five years. When the recent data was applied, differences in the regions appeared to narrow down.

The adjustment in the limit on LTV (from 60 percent to 70 percent) following what is called the 7.24 Measure, the government’s follow-up measure to ease the regulations on housing finance accounted on July 24, 2014, is considered to have been made within the critical level of proper LTV. Yet, the data from the Bank of Korea (2014) shows that although the nation’s average LTV (face LTV) stands at 49.4 percent, which is relatively lower compared to other countries, an effective LTV which includes chonsei (a rental system unique to Korea that requires one large and lump- sum deposit) deposits increases to 58.7 percent, and as regards chonsei houses alone, an effective LTV escalates to 75.7 percent. The risk from a high effective LTV is highly likely to be adjusted during the process gearing toward the critical level of proper LTV by measures such as changes to a combination of chonsei and rent, shifts from chonsei to purchase and sales, and guarantee insurance for deposits. Nonetheless, for a stable housing finance market, it is necessary to continue monitoring LTV and provide tenants with the proper LTV as a guideline when they make choices for rental homes.

3. Increasing financial inclusion in the housing finance market and efficiency in housing finance

Next, collateral constraints of using housing finance were analyzed. Households

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subject to collateral constraints accounted for 18.6 percent. When categorized by the types of constraints, those subjects to asset constraint¹⁾ were greater than those subject to income constraint²⁾ : as the age of the householder decreased, the share of households subject to the asset constraint increased. Easing the asset constraint would have a greater effect than easing the income constraint on increasing the rate of inclusion in the housing finance market; in particular, younger users are expected to get more benefit from a relaxed asset constraint of the housing finance market.

When analyzed by income status, lower income households are more likely to be subject to collateral constraints. According to the characteristics of these households, first-time homebuyers are most likely to be subject to collateral constraints, followed by families with many children and then newlyweds. A series of the housing finance programs are being considered to help ease collateral constraints on households with these kinds of characteristics

Table 2. Shares of households restricted to use housing finance (%)

Table 3. Decreases on collateral constraints by easing the housing financial regulations according to household characteristics (%p)

Category Asset constraint Income constraint Collateral constraints Shares of households restricted

to use housing finance 15.6 6.5 18.6

Source

According to this analysis, the ease of regulation on the housing finance following the 7.24 Measure resulted in decreases in the shares of households subject to the asset constraint and income constraint by –7.3 percent point and –1.2 percent point; the entire households subject to the collateral constraint have decreased by –6.9 percent point. Families with younger heads have seen the greater effect of the deregulation: low- and middle-income families have seen the greatest effect of the deregulation (-8.3 percent point). Low-income families have seen the effect of deregulation of -8.0 percent point, which was similar to that of middle-income families (-8.6 percent point). When examined by the types of housing tenure, chonsei households have seen the greatest effect of deregulation, so it can be said that easing housing finance regulations relieved collateral constraints that have inhibited shifts from chonsei to purchase and sales.

Category Asset Constraint Income Constraint Collateral Constraint

Ages 30–39 -12.6 -1.4 -11.3

First-time homebuyers -12.0 -2.5 -11.3

Low-income families -8.0 -0.9 -5.2

Middle-income

families -8.6 -1.5 -8.3

Chonsei -9.5 -1.7 -9.0

1) Asset constraint means that, based on the borrower’s net assets, the amount of loan possible for buying a house cannot be secured within the LTV limit.

2) Income constraint means that based on the borrower's income, an ability to pay back principle and interest for the mortgage loan amount exceeds the debt-to-income (DTI) limit.

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4. Protecting consumer in the housing finance market

A recent trend has emerged toward protecting consumers in the housing finance market by providing them with complete explanations about the risk involved and detailed information to help them compare mortgages and make right choices. This trend highlights the necessity of providing customers with thorough and accurate information so that they can make wise choices and manage risk.

German consumers, for example, are given a “cooling off” right that allows them to terminate contracts without penalty for breach within 14 days. Korea needs to benchmark Germany’s case and develop similar relevant policy. Germany also encourages financial institutions to acquire exact information such as borrowers’

income before approving loans. In other words, the country recognizes the significance of risk that could take place in the housing financial market if insufficient information is provided during the loan approval process. Korea also needs to systematically manage and monitor risk regarding approving loans in the housing finance market.

On the other hand, non-recourse loans have the potential for strategic default caused by borrowers and the risk of non-recourse loans could pass on to consumers.

Before adopting non-recourse loans, it is necessary to conduct ongoing reviews and discussion on various prerequisites.

5. Basic direction for the housing finance market and system

In conclusion, the research conducted recommended the following five policy plans: i) strengthen market monitoring and manage risk; ii) diversify mortgage loan programs;

iii) expand the ways to liquidize housing assets; iv) encourage a mortgage guarantee scheme; and v) increase customer protection.

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Source

Table 4. Basic action and policy plans to establish the housing finance support system

Basic action Policy plans for the housing finance market

Improve monitoring of the housing financial market and manage risk

① Establish a monitoring system

② Systematically manage information on loan approvals

③ Improve the availability of statistics data

④ Strengthen the risk management system for a reverse mortgage

Diversify mortgage loan products

① Mortgage loans for residential purposes

② Mortgage loans for lease purposes

③ Mortgage loans for Rent First, Buy Later scheme

Expand liquidation of housing assets

① Liquidize housing assets by a Lease Buyback Scheme

② Encourage a reverse mortgage option

Encourage mortgage guarantee scheme

① Implement mortgage guarantee scheme for the households on the way of forming a family

② Introduce a mortgage guarantee scheme for shifts from rental to purchase and sale

③ Develop a comprehensive mortgage guarantee plan

Increase customer protection

① Provide customers with a variety of comparative market information

② Review giving consumers the right to terminate housing finance contracts

③ Consider the methods for adopting non-recourse loans

This article is a summary of the research paper Developments in Financial Systems and Challenges for the Housing Sector, which can be found at KRIHS English Web

site (http://eng.krihs.re.kr).

Park Chungyu Director, Center for Real Estate Market Analysis, Korea Research Institute for Human Settlements cgpark@krihs.re.kr

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2014 KRIHS Research Projects

IN-DEPTH LOOK

I

n this volume, the section “Issues & Trends” presents KRIHS’ selected research projects on housing issues. Up until this issue, Space & Environment has focused on introducing the nation’s research trends, but the editors have always hoped that the publication could share more of KRIHS’ outstanding research results.

Pursuant to this hope, the “In-Depth Look” section in this volume 62 provides a brief description of KRIHS research projects and studies for 2014.

KRHIS set its 2014 goal as “developing land planning and management policy for the nation’s vision of public happiness.” In order to achieve this goal, KRIHS laid out the following three research directions: develop new land planning and management policies for the happiness of everyone, everywhere; support the regional development of decent employment opportunities; and support future-oriented policy and performance development for creative convergence. Under these directions, KRIHS carried out a total of 222 research projects. Of these, 33 basic research projects except regular and commissioned ones are presented here according to Division.

Research projects by the National Territorial Planning and Research Division are:

A Study on the Examination and Application of the Regional Resilience for Sustainable Development (Principal Investigator: Ha Soojung)

Method Development and Application for Sustainable National Territorial Planning (PI: Min Seonghee)

Development and Application of an Agent Based Urban Simulation Model (PI: Kim Donghan)

The Use of Spatial Big Data for Planning Policy Support (PI: Kim Donghan) The Strategic Suggestions on Cross-border Projects in Tumen Region (PI: Kim Cheonkyu, Lee Sangjun)

A Study on Diagnosis and Continuous Growth Measures of Industrial Cities (PI: Chang Cheolsoon)

A Study on Indicators Development and Investment Direction for Life Oriented Water Resources Policy (PI: Kim Changhyun)

The Policy Directions to relieve the Inter-regional Cultural Disparities (PI: Park Taesun)

A Study on the Causes of Excess Demand Prediction and Its Improvement Measures for the Regional Development Projects (PI: Ahn Hongki)

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IN-DEPTH LOOK

Facilitating Regional Collaboration for the Success of the HOPE Area Project (PI: Cha Misook)

A Study on Urban Development Models and Implementation Strategies for Selective North Korean Cities (PI: Lee Sangjun)

Future Prospect and Strategies for National Territorial Development (III) (PI: Lee Yongwoo, Sohn Hakgi)

Research projects by the Land Management and Urban Research Division are:

Improvements of Development Permit System for Non-urban Area Addressing the Change of Urban Planning Regulation System (PI: Kim Dongkun)

Policy Directions for the Supply of Public Facilities in Depopulated Areas of Korea (PI: Byun Pilsung)

Urban Regeneration and the Location Characteristics of Creative Industries and Classes (PI: Kim Eunnan)

Mixed-use Development of Industrial Complexes by Strengthening Innovation and Living Environments (PI: Seo Yeonmi)

Promoting Private Sector’s Participation for Urban Regeneration (PI: Yu Jaeyun) A Study on the Making Healthy Cities in the Era of Wellbeing (II): Developing a Practical Protocol to Implement the Healthy City Guideline (PI: Kim Taehwan, Kim Eunjung)

Research projects by the Housing and Land Research Division are:

Economic Impacts of the Real Estate Industry and Policy Tasks for Promoting the Industry (PI: Jung Heenam, Kim Seungjong)

A Study on the Housing Welfare Indices (PI: Kang Mina)

A Study on Establishment of the Cooperative Business Ecosystem in Construction Industry (PI: Kim Sungil)

An Analysis on Economic Impacts of Changes in Property Tax (PI: Park Joon) A Study on Customized Policy Measures Addressing Low-income Renter’s Housing Cost Burden Responding to Rental Market Change (PI: Park Miseon)

Developments in Financial Systems and Challenges for the Housing Sector (PI: Park Chungyu)

A Study on Establishing the Policy for Public Land Supply System in Post-developmental Era (PI: Choi Soo, Lee Hyungchan)

A Study on the Development of Residential Neighborhood Regeneration Effect Analysis System (II) (PI: Jeon Sungje)

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Microdynamic Analysis and Policy Simulation Model on Real Estate Market in Korea (II) (PI: Park Chungyu)

Research projects by the Infrastructure Research Division are

Development and Application of Activity-based Simulation Models for Promotion of Transportation Policy Effectiveness (II) (PI: Lee Backjin, Yoon Seoyoun)

The Application of Smart Cell in Space Policy (PI: Kim Jonghak)

Direction of Transportation Policies Corresponding to the Megatrends (PI: Cho Namgeon)

Safe Environment against Traffic Accidents (PI: Kim Joonki)

Research projects by the Geospatial Information Research Division are:

A Study on Building and Utilization of Spatial Knowledge Platform for Scientific Territorial Planning (PI: Kim Daejong)

Developing Territorial Indicators for Place-based and Citizen-oriented Policy Making (PI: Im Eunsun)

Abstracts of the research projects above can be found at KRIHS English Web site.

(http://eng.krihs.re.kr)

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GLOBAL PARTNERSHIP NEWS

Participants from Nepal (top) and Bangladesh (bottom) pose for a group photo.

Participants from LAC countries posing after the closing ceremony of KIUDA

KRIHS and WB Co-organize Municipal Capacity Building Programs for Nepal and Bangladesh

The Global Development Partnership Center (GDPC) of the Korea Research Institute for Human Settlements (KRIHS) and the World Bank jointly organized the Municipal Capacity Building Program (MCBP) for Nepal and Bangladesh, respectively, during the last two weeks of April 2015.

Between April 13 and April 17, a delegation consisting of 31 people from Nepal and the World Bank visited Korea and formed the program. Participants included officials from the Nepal central government and municipalities; Mr. Tashi Tenzing and Mr. Pawan Bilas Lohani, consultants from the World Bank; and the urban specialist Mr. Kim Sangmoo, also from the World Bank. The MCBP consisted of workshops and group discussions to share and discuss Korea’s experience and knowledge in national, urban, and regional land planning and development, urban regeneration, cultural preservation, and municipal finance. Designed particularly for Nepal that has a number of world heritage sites, the program also included site visits to Korea’s world heritages such as Suwon Hwaseong Fortress and Changdeokgung Palace to share Korea’s experience in the management of world heritage sites.

From April 27 to May 1, KRIHS and the World Bank organized another Municipal Capacity Building Program, this time for Bangladesh. This program was organized to share and discuss national, urban, and regional land planning and development policy, urban regeneration, waste and water management, and municipal finance and asset management. Nine participants consisted of officials from the central government and municipalities of Bangladesh and staff from the World Bank, including Ms. Shenhua Wang, senior urban specialist; and consultants Mr. P. U.

Asnani, Mr. Akram-ul Aziz, and Ms. Fen Wei.

In addition to the two Municipal Capacity Building programs, KRIHS and the World Bank are planning to organize a follow-up program for Bangladesh. The second Municipal Capacity Building Program for Bangladesh will be held between July 27 and July 31, 2015, at KRIHS in Anyang, Korea. The delegation of 17 Bangladesh officials from the Local Government Engineering Department (LGED) and six municipalities who could not attend the first program due to the domestic affairs will join the program along with three staff from the World Bank.

GDPC Develops Second KRIHS-IDB Urban Development Academy (KIUDA)

The Global Development Partnership Center invited high-ranking government officials from Latin American and Carribean (LAC) countries and staff from the Interamerican Development Bank (IDB) to the 2015 KRIHS-IDB Urban Development Academy (KIUDA) between July 6 and July 13.

After signing an Memorandum of Understanding with the IDB in October 2012,

GLOBAL PARTNERSHIP NEWS

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TEL 82-31-380-0588 FAX 82-31-380-0480 E-Mail gazette@krihs.re.kr Website www.krihs.re.kr Publisher Kim Dongju Editor Chung Ilho Assistant Editor Chang Iouchung

Editorial Committee Cho Chunman, Lee Hyunju, Nam Kichan, Kim Seong Soo, Hong Saheum, Kim Joon Ki, Lee Youngjoo, Park Sehoon, Seo Yeonmi, Park Soonup, Park Joon

Korea Research Institute for Human Settlements 254 Simin-daero Dongan-gu Anyang-si Gyeonggi-do, 431-712, Korea

Participants at the EAROPH Regional Seminar 2015

KRIHS has organized yearly workshops, training courses, and joint study since 2013; and in 2014, the two institutions reached an agreement to implement KIUDA, the joint three-year education program. As part of the second-year program of KIUDA, this year’s training was designed to share Korea’s knowledge and experience in land and specifically new town development, housing policy, and smart cities. Participants included high-ranking officials and policy makers from 12 different LAC countries including Jamaica, Costa Rica, Mexico, Colombia, and Paraguay. Discussion included preparations to organize the KIUDA forum to be held in October 2015.

KRIHS Seeks More Partnership Opportunities in Asia-Pacific Region at EAROPH Regional Seminar 2015

Representing EAROPH Korea, KRIHS attended the EAROPH Regional Seminar 2015 held from June 1 to June 3, 2015, at Ureshino, Japan. EAROPH, or the Eastern Regional Organization for Planning and Human Settlements, is a non-governmental organization founded to promote a better understanding of human settlements and encourage excellence in planning, development, and management among countries in the Asia-Pacific region.

KRIHS attended the 48th Executive Committee Meeting, which was a part of the Regional Seminar, and sought ways to expand development partnerships in the region and promote KRIHS research achievements and international education activities. In the EXCO meeting, Dr. Park Miseon from KRIHS reported the activities of EAROPH Korea and presented ongoing KRIHS land development projects undertaken in EAROPH member countries. Dr. Park also sought opportunities for joint research among member countries. The Seminar included discussion of low-income housing policies to mitigate housing poverty and improve residence stability.

We correct “Agina” to “Aging” on the title “The Crisis of Agina SOC Compels Safety Countermeasures,” and Lee Jae Yong, the author of “Building a Smart and Safe City: Focus on Reducing Crime,” as a research fellow from our last issue of Space and Environment. We apologize for our errors and we will redouble our efforts to strengthen Space and Environment.