A New Policy Paradigm
- KDI series in Economic Policy and Development
Edited by Susan Wachter, Man Cho and Moon Joong Tcha
Chapter 9: Korea's development finance at the crossroads
Before the Asian economic crisis the Korean government had effectively blocked financial resources channeled into the real estate sector, since it tried to mobilize as much resources as possible to promote the export-oriented manufacturing sector. Banks were banned from making loans for purchase of land (except as sites to build small houses and factories), for construction or purchase of large houses, and for other real estate businesses. Since official housing finance could only partially support real estate developers and home buyers, peculiar financial instruments which do not involve financial intermediaries have been developed and widely used. For home owners, the Chonsei rental system with which an owner of a house effectively borrows from the tenant has been popular. For home builders, the pre-sale of new houses has been the norm. The rules on housing development and supply allow the home builders to be paid the contract deposit and interim payments by the home buyers before the houses are completed. In effect, home buyers directly supply funds to the builders without the involvement of financial intermediaries. In 1994, such contract deposits and interim payments amounted to 26 trillion won, 3.5 times as much as the housing construction loans supplied by financial institutions in that year (Lee and Cho, 1995). In the wake of the Asian economic crisis, as part of the sweeping economic reform to cope with the crisis, major deregulation of the real estate sector was taken in 1998 and the following years.
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