[Editorial] The Threat of Rising Household Debt

Outstanding debt on mortgage loans reached 351 trillion won (308 billion U.S. dollars) at the end of last year. The net increase hit a record high of 43 trillion won (37.8 billion dollars), up from last year’s rise of 36 trillion won (31.6 billion dollars). The combined household debt including mortgage loans expanded to 713 trillion won (626 billion dollars) in the third quarter last year. GDP grew 170 percent over the past nine years, but household debt shot up 320 percent. Korea’s debt-to-income ratio is also greater than those of other countries.

The interest burden is also getting heavier. Flexible interest rates on mortgage loans extended by commercial banks range from the upper four percent to mid-six percent, the largest range in a year. A rise in certificates of deposit forced interest on loans to rise 0.07 percentage points in two weeks. If interest rises 0.1 percentage point, the interest burden on households increases about 500 billion won (440 million dollars) a year. Samsung Economic Research Institute said the household interest burden due to bank loans is expected to rise more than two trillion won (1.75 billion dollars) in the first half of this year from last year.

If an exit strategy is implemented to prevent the economy from overheating and market liquidity accordingly declines and interest rates rise, households will be hit hard in being unable to repay their debts. LG Economic Research Institute said 51 trillion won (44.8 billion dollars) of mortgage loans to be repaid in a lump sum mature this year. It said certain borrowers will be forced to sell assets to repay principal. The International Monetary Fund warned that a rise of one to three percentage points in interest rates in Korea will raise the household default rate 8.5 to 17 percentage points.

To reduce household debt, income must rise. The job market, however, remains in bad shape. The official jobless number was 819,000 in November last year. If the 999,000 unemployed people who have given up looking for work are included, however, the number of unemployed rises to 3.3 million, up 367,000 from the previous year’s figure. The Korean economy is recovering but the job market will remain sluggish for the time being.

A government official said household debt has not reached an alarming level, but this comment is hardly a cause for comfort. The Korean economy is riddled with risks such as lack of jobs, rising household debt, a property bubble, financial institutions with non-performing loans, and lackluster domestic consumption. Since these negative factors are intertwined, any deterioration of one of them will create another economic crisis for Korea. Market watchers say rising household debt could hamper recovery. The Korea Institute of Finance urges caution in implementing a full-fledged exit strategy because of this. For their part, financial institutions, which aggressively extended loans to households instead of small and mid-size companies last year, should not seek to profits by raising interest rates. The government, financial sector and households should join forces to reduce risks that could accompany economic recovery.