Yoon Ja-young is in charge of articles translated by a generative AI system and edited by The Korea Times. She is interested in improving the newspaper through AI.
Household debt risks growing
By Yoon Ja-young
By Yoon Ja-young
Concerns are growing over households’ ability to repay their debt in the wake of the U.S. Federal Reserve’s rate hike, analysts said Friday.
The rate hike is expected to eventually build pressure on interest rates here although the central bank is expected to keep its key rate steady for a while due to the sluggish domestic economy, they added.
According to the Bank of Korea (BOK), total household debt posted an all-time high of 1,166 trillion won as of September, up 34.5 trillion won from three months ago. Analysts expect it to surpass 1,200 trillion won this year.
The debt has been increasing steeply following a series of key rate cuts and the government’s deregulation of mortgages aimed at boosting the real estate market.
“Korea fared well during the global financial crisis in 2008 and 2009. However, it is one of the few countries that went without deleveraging,” said Cho Dong-chul, chief economist at the Korea Development Institute.
He said the focus should be on enhancing soundness of the financial sector, as it will be harder to control household debt as time passes.
Analysts expect interest rates will start going up next year gradually, increasing the risk of defaults by debt-ridden households with low credit standing and low income.
“The interest rate will rise further next year, though it isn’t likely to be steep. As it is still very low compared with the past, the delinquency ratio won’t rise much,” said Huh Moon-jong, a researcher at Woori Finance Research Institute.
However, he warned that the increasing burden of debt will weigh on households, making them cut spending. “Korea is already suffering from sagging consumption due to structural factors. The rising interest rate will deteriorate the situation,” he added.
Emerging economies are raising rates on fears of a capital exodus following the U.S. interest rate hike. The BOK hasn’t raised its rate yet, but interest rates are already rising in the market.
According to the Korea Federation of Banks, the Cost of Fund Index rates, which work as a benchmark for mortgages, surged to 1.66 percent in November from 1.57 percent of the previous month, marking the steepest rise since August 2011. As a result, the interest rate for mortgages at commercial banks rose by around 0.2 percentage points from November.
The problem is that most households are vulnerable to interest rate hikes as 70 percent of mortgages are on floating rates.
If the BOK raises its key rate by 1 percentage point, the aggregate interest burden on those who borrowed money on floating rates will increase 7.7 trillion won.
According to a financial stability report released by the BOK, 1.12 million households will be vulnerable in the case of a rate hike.
The result will be more dismal if the rate hike is coupled with a fall in the housing market. If the interest rate rises by 2 percentage points and housing prices fall by 10 percent, the central bank estimates that 32.3 percent of the household debt will be vulnerable.
The housing market is already showing signs of losing steam. According to Real Estate 114, a housing market information provider, prices of apartments in upscale Gangnam in Seoul fell for two consecutive weeks, and apartments at suburban new towns like Bundang and Pyeongchon also dropped.