Housing and housing finance in the Republic of Korea: part 2

Federal Home Loan Bank Board Journal, March, 1984 by Choon Bae Park

Housing and Housing Finance in the Republic of Korea: Part 2

Housing Financial Institutions

Financial institutions in the Republic of Korea largely fall into four categories: 1) monetary institutions; 2) nonmonetary institutions; 3) quasi-monetary institutions; and 4) the securities market.

Monetary institutions consist of the Bank of Korea, which is the central bank of the Republic of Korea, and deposit money banks.

Deposit money banks include commercial banks consisting of 7 nationwide commercial banks, 10 local banks and 42 branches of foreign banks, and 6 special banks geared specifically to pursue government policies.

Nonmonetary institutions are made up of the Korea Credit Guarantee Fund and leasing companies.

The securities market comprises of the Korea Stock Exchange and 27 securities companies.

Among these financial insitutions, the Korea Housing Bank (KHB), the Citizens National Bank (CNB), the National Agricultural Cooperatives Federation (NACF), and life insurance companies are involved in housing finance activities.

With the exception of the KHB, these housing financial institutions merely deal with housing finance as incidental to their main business. Only the KHB specializes in housing finance.

As for housing fund resources, banking institutions depend on various types of deposits from the private sector, while life insurance companies depend on premium payments made by policyholders.

It should be noted that few institutions are interested in mortgage investment in the absence of the secondary mortgage market.

Housing Investment and Role of Housing Finance

In 1982, a total of 3,213 billion Won* was invested in housing construction, producing 191,000 housing units. Of that amount, only 18.8 percent or 605.1 billion Won was supplied by housing financial institutions while purchasers' downpayments accounted for the remaining 81.2 percent.

* US $1 is presently equivalent to about 800 Won.

The KHB and the National Housing Fund (NHF) played a pivotal role in financing housing funds, accounting for 27.8 percent and 59.1 percent of the total housing loans, respectively. The central government and local governments held 9.3 percent, foreign loans 2.8 percent, and the NACF 1.0 percent.

The outstanding balance of housing loans amounted to 1,400.7 billion Won at the end of 1982, accounting for 7.1 percent of total loans and discounts of deposit money banks. The proportion of housing loans to total loans and discounts is relatively low compared with those of the developed countries. The proportion, however, would be higher if we took account of the short-term commercial loans, a considerable portion of which has been actually used for housing purchases or construction. (See Table 1.)

Flow of Housing Funds

The channels of housing finance are largely divided into two categories: (1) the public sector, raising housing funds through the government's budget, foreign loans, and sale of public bonds and lotteries pursuant to the Housing Construction Promotion Law, and (2) the private sector in which the KHB, the CNB, the NACF, and insurance companies are playing major roles.

In the public sector, the central government provides the state-run KNHC with funds for the construction of rental houses and apartments, supplies the NACF with rural housing improvement funds, and assists other public housing projects. Local governments perform the public housing construction projects with funds from the government's gudget and the NHF.

The NHF raises its funds through national housing bonds, housing lotteries, housing preemption subscription deposits, and deposits from various public funds, and finances housing projects of local governments and the KNHC. The actual management of the fund is now entrusted to the KHB in accordance with the provisions of the Housing Construction Promotion Law, as amended in 1981. Total assets of the NHF reached 1,148 billion Won and the outstanding balance of loan amounted to 803 billion Won at the end of 1982.

On the other hand, the KHB is playing a significant role in extending housing loans for the private sector. The Bank raises funds through various types of deposits and housing installment savings deposits, and supplies them for housing construction and purchase to builders, as well as individual home purchasers. The KHB's total assets reached 1,700 billion Won as of 1982. It occupies more than 60 percent of the total outstanding balance of housing loans in the private sector.

The NACF supplies rural housing improvement funds. It raises funds through deposits, borrowings from the central government, local governments, and the NHF.

Life insurance companies provide housing loans as an integral part of the packaged insurance benefit. They lend an equal amount of insurance money when policyholders or the insured construct or purchase a house. The loan could be set off with insurance money if the policyholders or the insured die or contract a terminal illness during the contract period.

Chart 1 shows sources and uses of housing funds in Korea.