By Kim Tong-hyung
Households are spending more than ever before to pay off their debts, official figures showed Wednesday, as they plunge further into the red on stagnant income and evaporating property values.
Families with two or more members paid 86,256 won (about $80) a month on interest during the April-June period, according to Statistics Korea. This represents an 11.4-percent increase from a year earlier and accounted for 2.32 percent of monthly household income. This likely means annual repayments will top 1 million won for the first time.
The monthly share of income devoted to mortgage, credit card and loan repayments during the second quarter was the highest since the government started tracking the figures in 2003. The country’s consumer debt has nearly doubled over the past six years to approach a quadrillion won, matching an entire year’s gross domestic product (GDP), and fueling concerns that Korea’s economy is being propped up by a fragile debt bubble.
Despite the record high, the interest burden fails to draw an accurate picture of the strain on family budgets. The national statistical office’s measurements were limited to interest payments on loans for property and spending on household items. The true cost of servicing debt is likely much higher as it will account for borrowing for business activities.
Also to be considered is the increasing share of income spent on taxes and essential bills like pensions and health-care insurance payments, and the toxic combination of the soaring cost of living and paltry wage increases.
Any way one looks at it, it’s obvious that Korean households are facing the most dramatic squeeze in living standards since the financial meltdown of the late-1990s.
Personal debt has become a ticking time bomb for the economy during the Lee Myung-bak administration, thanks to the now-crashed property boom, stock market woes and consistently cheap credit that bred live-now, pay-later behavior.
Just six years after breaching the 500-trillion-won level for the first time, the mountain of debt amassed by Korean households has reached 876.4 trillion won (about $807.5 billion) at the end of June, after adding 19 trillion won in the second quarter alone, the Bank of Korea (BOK) said.
The central bank’s figures represent individuals’ loans from financial institutions like banks, credit card companies and state housing finance agencies. When combining unsecured loans, non-interest paying debt and money borrowed by the self-employed and non-profit organizations, the scale of debt is believed to have surpassed one quadrillion won.
“The household spending on servicing debt is increasing with the consumer debt becoming bigger and interest rates going up,” said a Statistics Korea official.
“To put it roughly, households are spending around 20 percent of their income to service debt and cover fixed-spending on non-consumption items like taxes, pension and insurance payment. This doesn’t include spending on food, clothes, education and other essentials. It could be said that the squeeze on family finances has been significant.”
The gloomy economic realities are biting harder into people on low incomes than households dependent on higher earners, Statistics Korea said.
The poorest 20 percent of families paid an average of 31,380 won a month in debt interest during the second quarter, up 40.8 percent from last year and accounting for 2.75 percent of their monthly income. Official figures show that these households spend around 40 percent of their income on servicing debt, taxes, insurance payments and food.