Korea Bank, “The Credit Danger of Household Economy is Increasing.”

The capacity of the household economy capable of managing debts has been decreasing dramatically, and it is anticipated that the credit of the household economy, in which families take out a security loan on their houses, would be more dangerous when the housing prices in Gangnam, Seoul actually crashes.

It is predicted that even if the economic conditions recover, there is a limit on the household economy’s ability to increase its spending and that the pace of recovering would be slower.

Korea Bank analyzed that the credit danger on the household economy has been high due to the capacity of managing the debt which has decreased considerably in weaker classes such as the low-income group and the youth in “The report for financial stability in October” released on November 5.

The report stated that both finance properties and the increasing rate of financial debts has been decreasing because of the recession and the policy of holding back household loans this year, but the ratio of financial debts to financial property was 48.2 percent at the end of June which is quite high compared to the 20-30 percent of developed countries such as the U.S., Japan, and the U.K.

In addition, the ratio of financial property to the Gross National Income (GNI) in Korea was 1.6 times in June. This is rather low compared to the U.S. (2.9 times) and Japan (2.8 times). It was analyzed that savings doesn’t have a role for buffering recessions.

The report pointed out that the real price of housing when we take into consideration the increase of public price has been marked up since 2001. From 2002, the real price of apartments has been bubbled over the average price which was calculated since 1898.

The report particularly pointed out that the real price per pyong (18 million 205 thousand won) of apartment in the Gangnam area as of September this year was 1.8 times the long-term average price (9,917,000 won), and this is considerably higher than the price of May 1991 (1.4 times).

With this, the report warned that the gradual disappearance of the bubble after the second half of 1991 could be presented in the apartments of particular areas, whose prices jumped up.

In the mean time, the balance of household loan in banks is 249 trillion, 234.6 billion won at the end of October at present, increasing by 4 trillion 259.4 billion won at the end of September, making this the biggest increase since last September’s jump of 6 trillion 122.1 billion won. The increased amount of security loan on housing is 2 trillion 717.1 billion won among household loans, and it also showed the most increase since last October’s 3 trillion 807.9 billion won.

Joong-Hyun Park sanjuck@donga.com