_{http://www.pictureninja.com/pages/south-korea/image-seoul-apartment-buildings.htm}

Nearly 82% of Korea’s population resides in urban areas and as of 2009, the urban population was growing at 0.5% annually. In 2005, Korean homeownership stood at 55.6%, down from 71.1% in 1970, though up from 49.9% in 1990 (Ronald and Jin, 2368). Household mortgage debt amounts to more than 36% of Korea’s GDP [1] (Kyung-Hwan and Man, 23).  More than 90 percent of outstanding mortgage loans are adjustable rate. High home price to income ratios and the continuing predominance of deposit-based funding operate as impediments to the expansion of fixed rate mortgage offerings. Established in 2004, the Korean Housing Finance Corporation (KHFC) purchases long-term mortgages from commercial banks in order to provide liquidity and increase the duration of loans available on the market (Chang, 4).  By the end of March 2010, KFHC's total mortgage-backed security issuances amounted to 5.8% of Korea's total mortgage debt outstanding (Chang). There has been discussion of adding covered bonds to the instruments used to access capital market funding (Kyung-Hwan and Man, 25).

The housing market in Korea has seen considerable change in the past two decades. The ratio between the number of housing units and the number of households has increased nationwide from 72 percent in 1990 to 109.9 percent in 2008 (Kyung-Hwan and Man, 21). Consumption of housing space per capita rose from 13.8 square meters in 1990 to 22.8 in 2005 (Kyung-Hwan and Man, 21). Korea no longer suffers from a national housing shortage, but instead faces a mismatch between the supply and demand in its submarkets (Kyung-Hwan and Man, 21). Sluggish housing production in Seoul and the capital region has led to price spikes there, while other parts of Korea face an oversupply of housing.

A government-led drive to build two million new dwellings between 1988 and 1992 helped to keep housing prices low and stable throughout the mid-1990’s, allowing the government to begin a retreat from its control of the housing market (Kyung-Hwan and Man, 20). Beginning in 1995, price controls on new apartments and regulations on the conversion of agricultural land were gradually reduced (Kyung-Hwan and Man, 20). In 1996, commercial banks entered the long-term mortgage business and, in the following year, the Korean Housing Bank (KHB), the monopolistic housing finance provider, was privatized. Before Korea deregulated its housing finance system in 1996, more than 80% of housing finance loans was held publically by the National Housing Fund (NHF) (Chang, 4).The NHF offered housing loans below market rate for lower-income households while the Korea Housing Bank (KHB) provided housing finance to high-income groups (Chang, 4).

Housing prices fell precipitously in the aftermath of the Asian Financial Crisis of 1998, prompting the Korean government to accelerate the relaxation of its control of the housing market (Chang, 4). Prices started to recover in 1999 and a boom that would last until 2007 began in late 2001, particularly in Seoul.

The housing finance sector is overseen by the Korean financial supervisory authority (the Financial Services Commission/Financial Supervisory Service, FCS/FSS) (Chang, 4). To prevent the overheating in mortgage lending and to minimize the risk of wide-scale loan default, the supervisory authority imposed a series of measures between 2002 and 2007: the risk weighting for mortgage loans was raised from 50 percent to between 60 and 70%, the minimum loan loss reserve ratios were raised for banks’ corporate and household loans classified as normal and precautionary; the maximum LTV ratio for mortgage loans was lowered from 75 to 40 percent in the Seoul metropolitan area; and additional mortgage lending restrictions were imposed on both banks and non-banking financial institutions (Kyung-Hwan and Man, 7).