'The problem is supply — if PF dries up, everything stops'

As President Lee Jae Myung has put housing supply at the center of his real estate policy, industry voices are growing louder for government-led measures to revive project financing. The calls focus on expanding public guarantees to allow financial institutions to extend more PF loans to developers, and on easing related prudential regulations. Financial regulators are already preparing a PF revival package.

According to government ministries, President Lee chaired a seven-hour marathon meeting with cabinet departments on Monday, ordering officials to identify every available administrative, financial, fiscal and deregulatory tool to boost housing supply. The financial regulator has since moved to draw up measures to stimulate PF lending.

PF loans are extended by financial institutions to project developers, with future revenues from a construction site serving as collateral. Typically, secondary lenders such as savings banks and capital companies provide "bridge loans" to fund land purchases; once permits and approvals are secured, commercial banks then execute the main PF loan. For developers, PF financing is effectively their financial lifeline.

The financial sector's PF loan balance has fallen sharply of late. According to the financial regulator, the outstanding balance stood at 134.2 trillion won ($94 billion) in March 2024, dropping to 115.5 trillion won by the end of March this year — a decline of nearly 20 trillion won in two years.

After the COVID-19 pandemic, a sharp rise in market interest rates combined with surging construction costs driven by global supply chain disruptions caused project viability to deteriorate rapidly, turning PF into the financial sector's biggest pressure point. Rising construction costs push up pre-sale prices, which in turn raises the risk of PF loan defaults. In response, the financial regulator has been pursuing a "soft-landing" strategy — tightening prudential rules on PF and winding down insolvent projects — a process analysts say has driven the sharp drop in outstanding loan balances.

Experts across the board agree that reviving PF — the funding pipeline — is the prerequisite for boosting housing supply. They argue that public guarantees should be expanded to encourage banks and other lenders to take on more PF business, and that prudential regulations should be partially adjusted.

Ko Jong-wan, head of the Korea Asset Management Research Institute, said the most immediately actionable financial measure is PF revival. "New PF is almost entirely blocked, and extensions on existing loans are not going through either. Bridge loan conversions to main PF are also not proceeding smoothly," he said.

Ko added that a more flexible policy approach is needed, including easing prudential rules such as risk-weight requirements. "However, given that secondary lenders indiscriminately extended PF loans in the past, leading to a deterioration in loan quality, internal screening standards need to be carefully established," he said.

An official at a major commercial bank said an expansion of public guarantees from institutions such as the Korea Housing and Urban Guarantee Corporation would allow banks to extend loans with less risk exposure. "Construction companies would also be able to borrow at lower interest rates," the official said.

Some also argue that lending regulations should be partially eased. Because PF loans are repaid from future pre-sale proceeds, a sufficient level of pre-sales is essential. Yoon Ji-hae, head of research at Real Estate R114, said easing loan restrictions on local residents is necessary to reduce unsold units in regional markets. "Reviving PF alone is just a stopgap measure," she said.

The government is also moving quickly to develop related measures. The financial regulator held a closed-door meeting with major construction companies and housing industry association representatives on Tuesday. The session was convened to hear industry concerns about PF following President Lee's Monday directive to each ministry to devise housing supply measures.

At the meeting, construction companies reportedly requested an expansion of public guarantees and a relaxation of risk-weight regulations on PF loans held by financial institutions. A financial regulator official said the requests largely reiterated longstanding industry demands. "We will carefully review the industry's requests and finalize our measures," the official said.

The financial regulator is also planning to exempt, in part, from banks' household lending caps the balance-payment loans for buyers who subscribed to apartments before June 27 last year. It is reportedly considering allocating a separate balance-payment loan quota based on a fixed proportion of last year's loan growth. Additional easing of lending restrictions for young borrowers and newlyweds is also under review.