Soaring household debt deepens woes

By Kim Jae-won

Korea’s outstanding household debt topped 1,200 trillion won ($971.6 billion) for the first time last December, up 41.1 trillion won from three months earlier on increasing mortgages and household loans, the Bank of Korea (BOK) said Wednesday.

It was the biggest quarterly gain in the time the central bank has been compiling data, starting 2002. The household debt reached 1,207 trillion won at the end of December, up 3.5 percent from the previous quarter. The debt compares with the country’s GDP value of 1,464 trillion won.

The BOK’s household debt tally is the sum of household borrowing from financial firms and unpaid credit card bills.

Household borrowing from banks and other financial firms jumped 39.4 trillion won during the fourth quarter to 1,141.8 trillion won. Their unpaid credit card debts rose 1.7 trillion won to 65.1 trillion won during the same period.

The BOK’s announcement came days after Standard & Poor's (S&P) warned of “high potential credit risks” involving the mounting debt.

“We think potential credit risks remain high given highly leveraged households,” S&P said in a report. “We saw some pickup in household debt in 2015, which has increased the vulnerability of highly leveraged Korean households to sudden drops in income or spikes in interest rates.”

Economists expressed concerns about the soaring debt which prevents consumption from expanding.

“Growing household debt definitely undermines the economy, as it makes people reluctant to open their wallets,” said Shin Min-young, a senior economist at LG Economic Research Institute.

He said sluggish consumption, coupled with weaker exports, will prevent the economy from posting any meaningful rebound.

Still, he expected growth of the debt to slow this year as the housing industry loses steam and regulators tighten controls on mortgages.

Korea’s economy expanded 2.6 percent last year, the lowest in three years. Its exports dropped 18.5 percent to $36.7 billion in January from a year ago, hit hard by a slowdown in the global economy.

The jump in household debt was attributed to increased home-backed loans prompted by low interest rates and a series of government measures aimed at boosting the property market.

Last year, the number of home transactions hit 1.19 million, jumping 18.8 percent from the previous year. Thanks to the rising transactions, mortgages offered by commercial and savings banks gained 22.2 trillion won to 563.7 trillion won in December from three months earlier.

In 2014, the government eased mortgage regulations such as loan-to-value and debt-to-income ratios, seeking to boost the sluggish real estate market. The central bank also helped the increase of household loans by cutting its key interest rate by 1 percentage point to 1.5 percent in 2014.

“Household lending by banks expanded at a greater speed than in the previous quarter on rising demand for mortgages,” the BOK said.