The Impacts of LTV Deregulation on Macroeconomy

The results of simulation show that lowering the LTV ceiling is a factor that increases household debt and expands macroeconomic sensitivity to changes in house prices. The level of Korea's LTV regulation is indeed more conservative than that of other major advanced economies, but its actual average LTV ratio with the posterior Jeonsei deposit considered cannot be deemed very low. Korea's actual LTV ratio with the posterior Jeonsei deposit considered is 58.7 percent, far below the alleged average LTV ratio or 49.4 percent.Taken all together, a full-scale LTV deregulation intended to stimulate the real estate market would not be a desirable one for now. Under the condition where mounting household debt pose a critical threat to the Korean economy, a cautious approach is demanded when considering a full-scale LTV deregulation which could only produce undesirable results, a larger debt. Not only that, in the current debt structure with a high proportion of flexible interest rates, alleviating liquidity constraints could increase household debt and heighten macroeconomic volatility. In this regard, it would be appropriate to take gradual steps about the consideration of lowering the LTV ceiling after household debt problems are stabilized and the quality of mortgage loan structure is improved.In the meantime, there needs to be continuous efforts to reasonably simplify existing LTV regulations that are being operated in an overly complex manner. One suggestion to consider is to rationalize the regulation of the low LTV ratio set for banks. Despite their relatively strong financial prudence, banks' low LTV ratio drives more debt payable households to seek loans offered by the non-banking sector. Furthermore, it would be advisable to consider how to reasonably simplify the regionally-differentiated LTV regulations adopted during the boom in real estate prices in the capital area