A suggestion has been made to widen the focus of domestic housing finance from supporting home purchases to housing stability through public rental dwellings. The argument is that, as household debt and principal-and-interest repayment burdens have grown in the process of supporting homeownership, it is necessary to expand public rental supply to reduce households' housing cost burden.
Koo Bon-seong, senior research fellow at the Korea Institute of Finance, in a report on the 5th titled "Expanding the inclusive role of domestic housing finance through the Vienna model," proposed Vienna, Austria's housing system—which continuously supplies and accumulates public rental dwellings—as an alternative model for domestic housing finance.
The Vienna model is a method in which the public sector leads the supply and management of rental dwellings. In Vienna, about 60% of all residents live in public housing, and public rental dwellings cover not only low-income groups but also the middle class. It stabilizes housing costs through cost-based rent setting and guarantees of long-term housing rights.
The report viewed that expanding the supply of public rental dwellings in Korea could lower housing cost burdens while also helping manage household debt. As the government has recently tightened macroprudential regulations to manage increases in mortgage loan and household loans, it said there is a need to establish a supply system that secures stable housing without directly owning dwellings.
Under the Vienna model, households without dwellings, newlyweds, and young people are offered affordable housing costs and long-term housing rights of up to 30 years. The report analyzed that this can lower households' actual housing expenses and curb the growth of household loans.
Domestic housing finance has so far focused on backing households' purchase of dwellings. Low interest rates and tax support, preferential rates and expanded loan limit for young people and newlyweds have supported ownership of dwellings. As dwellings have come to be seen not only as a means of residence but also as a key means of accumulating household asset, housing finance has also grown with an ownership focus.
However, the report noted that in the process of promoting homeownership, household debt has continued to rise and the burden of principal and interest repayments on mortgage loan relative to income has grown. While there was an asset accumulation effect during periods of rising dwelling prices, it explained that there has also been the side effect of a prolonged debt repayment burden.
The key to expanding public rental dwellings is funding. While Vienna mainly finances public housing supply through a housing tax, the report analyzed that, in Korea, the share of public rental dwellings can be raised quickly only by using funds from the private financial sector as a core source.
A recommendation was also made to create policy incentives so the financial sector can supply funds to public rental projects over the long term. Proposals included lowering risk weights on bank loans, reducing income tax on interest from long-term finance, and reflecting public housing finance in mutually beneficial finance indicators.
Unlike existing household loans, public rental dwelling finance involves financial institutions participating as creditors or investors in individual dwelling projects. Accordingly, capital expense may be higher than for household loans, but returns could actually be lower, so separate support measures are needed to encourage participation by the financial sector, the report said.
Public-private cooperation is also required. It said loan guarantees for housing suppliers linked to the public sector should be expanded, long-term finance and tax support should be provided for small and mid-sized dwelling developments, and policy funds should be secured for land purchases. The report proposed linking policy funds and private finance so that using publicly owned land or recouping development gains by the public can translate into lower rents.
The Seoul city government last year enacted a local government ordinance establishing a housing promotion fund to be operated through 2030 to boost the supply of public rental dwellings and public support rental dwellings similar to the Vienna model.
Research fellow Koo viewed that a consistent, long-term policy must underpin the effort to build a housing system centered on public rentals. It said there is a need to expand housing finance—currently focused on supporting households' ownership of dwellings—into supplying long-term finance for housing project operators to strengthen financial institutions' social responsibility.