Household Debt Reaches New High of 450 Trillion Won

Household debt has surpassed 45 trillion won and reached a new high. With a per-household average debt hovering 30 million won, concerns over a credit crunch in the household sector are increasingly rising as more and more debt is undermining the solvency ratio, or a household’s financial assets against debt. The Korean household’s ability to service its debt is much worse than such advanced countries as the U.S. and Japan.

The total of outstanding household debts reached 450.5 trillion won in March, the Bank of Korea (BOK) said in a quarterly household credit report for the first quarter (January through March) released on June 7. This represents a 0.5 percent increase compared with 447.6 trillion won in late last year and the highest level since 1997, the benchmark year.

Household debt, or the total of household loans and credit purchases, was 214.7 trillion won in late 1999, 266.9 trillion won in late 2000, 341.8 trillion won in late 2001, and 439.6 trillion won in late 2002. The upward trend has slowed in the past year.

Household loans stand at 425.7 trillion won, up 1.1 percent year-on-year. Credit purchases fell 1.9 trillion won, or 7 percent, to 24.8 trillion won.

Per-household debt, the total household debt divided by the number of households, rose by 19,000 won to a new high of 29.5 million won, compared to the previous figure of 29.3 million won. “As financial institutions have become stringent about loans, the increased rate of household loans slowed,” said Byun Ki-seok, BOK statistics director. “Credit purchases are continuous falling as a result of a fall in consumption. However, this downward trend has stemmed, compared with a 63 percent fall during the fourth quarter of last year.

The increase in the ratio of household financial assets against debt has continuously slowed as it stood at 2.44 in 2002, 2.07 in 2002, and 2.06 in 2003, said the Korea Institute of Finance. The country’s ratio is far lower than the U.S.’s 3.4, Japan’s 3.5 and France’s 5.5.

“In particular, debt loads have risen for small business owners and other low-income earners,” Choi Kong-pil, chief researcher at the institute, said. “Given the state of things, excessive control on real-estate prices, which adversely affect the ability to pay debts by depreciating the value of assets, should be reconsidered.”

Joong-Hyun Park sanjuck@donga.com