Household Bubbles Burst Out?

New facts show that the current economic downturn is bringing some of unexpected advantages: bubbles formed in the household sector are bursting due to reduced consumer confidence and stringent loan processing by financial institutions.

According to a report on household credit trends in the first quarter released by the Bank of Korea on June 4, the balance of household credit (loans plus purchased items) as of late March reached 439 trillion and 339.3 billion won, only up by 0.1 percent compared to 439 trillion and 59.8 billion won late last year.

This increase rate has been the lowest since the foreign currency crisis, significantly reduced compared to the increased amount of 14 trillion and 700 billion won for the fourth quarter of 2002.

Debts-per-household stood at 29,160,000 won only up by 10,000 won compared to the previous quarter, reaching less than 30 million won.

The increasing amount of bank loans by households was also halved from 11 trillion and 179.5 billion won to 5 trillion and 634.1 billion won.

The balance amount for credit purchases has been reduced remarkably by 5 trillion and 354.6 billion won (11.2 percent), which has been the biggest reduction in history.

Especially, credit card companies` sales credits reduced by 4 trillion and 656.4 billion won while those of automobile companies and department stores went down by 632.6 billion won.

Currency Financial Statistics Team Chief at Bank of Korea Lee Young-bok said, “Household debts have kept increasing but are being pulled down by various stringent measures on financial institutions. Bubbles are being burst.”

A researcher at the Korea Institute of Finance Lee Gun-bum also said, “This is time to make efforts to lead overblown household debts to a soft-landing direction.”

Bank of Korea warned that still the household debts against income level are higher than the international standard while the bubbles are being ridden.

Household credit rating against an individual`s NDI (Net Disposable Income) reached as high as 131.7 percent, paramount to U.S.` 112.1 percent and Japan`s 136.4 percent. If the rating goes over 100 percent, that means more debt than income.

The household credit rating against the current GDP was recorded at 84.1 percent, higher than the U.S.` 83.9 percent and Japan`s 81 percent.

The Bank of Korea reported that economic instability has been deepening with increased household loans and credit card payment delays despite diminishing bubbles in the household sector.

The Bank emphasized that related authorities should continue to take up a repressive policy against household loans while activating the flexible house security bond market and coming up with the correct measures to prevent an additional generation of bad credit holders.

Kwu-Jin Lim mhjh22@donga.com