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Middle Income Earners Had 59% Increase in Loans

Posted April. 06, 2007 08:01,   


Over the past four years, the middle class saw a bigger increase in their mortgage loans than any other income groups except the richest.

The share of loans used for buying houses especially surged, and some say a mortgage crisis could break out when housing prices drop.

On April 4, this newspaper acquired a Korean Development Institute (KDI) report entitled, “Risk factors in the Korean housing financial market.” According to the report, the burden of paying back mortgages for all income classes substantially increased last year compared to 2002.

Commissioned by the Financial Supervisory Service, the KDI categorized those who got loans from commercial banks from 2002 to 2006 into 10 groups according to their income levels and analyzed their financial situations. Group 1 in the report consisted of people with an average annual income of 17.5 million won ($18,760) as of 2006, and those in Group 10 earned 111.3 million won ($119,310) annually. So the bigger the group number, the larger the income amount.

The average annual income of Group 5, the median income group, increased to 39.5 million won ($42,340) last year, up 25.4% or 8 million won ($8,575) from 2002.

But the amount of mortgage debt increased by 59.0% or 32 million won ($34,300) from 54.2 million won ($58,100) in 2002 to 86.2 million won ($92,400) in 2005.

During that period, Group 10 had the highest increase in loans (91.7%) among other groups, and Group 5 followed with 59%. Group 9 recorded 55.3%, followed by Group 8, Group 6, and Group 7 with 47.0%, 45.8%, and 38.8%, respectively.

Despite its lower income level, Group 5 had a bigger increase in loans than Groups 6, 7, 8, and 9. When repaying the loans, however, the middle income group will face relatively bigger difficulties.

In the past, mortgage loans were used for various reasons such as buying cars, paying daily expenses as well as purchasing houses. Today, however, loans are mostly taken out to buy homes. In 2002, only 1.5 out of 10 people got mortgages to buy houses. But in 2006, the number increased to 4.4 out of 10.

Compared with high income groups, more people in the middle and lower income classes used their loans for purchasing homes. So they will be hit hard when house prices drop.

When it comes to ratio of debt to income (DTI), low income groups had a bigger number than other groups. The bigger the DTI, the larger the amount of annual repayment was.

In terms of DTI, Group 1 topped the list with 27.6%, while other groups followed with 7.4% (Group 2), 5.0% (Group 4), 3.7% (Group 6), 3.8% (Group 8), and 13.6% (Group 10). The numbers were high in low and high income groups, and low in middle income groups.

“In Korea, increasing interest rates raise the lending rates. Therefore, there could be a series of bankruptcies among households with relatively big loans and small income,” said Konkuk University economics professor Goh Seong-soo.