By Nam Hyun-woo
President Moon Jae-in is speeding up his efforts to cope with Korea’s snowballing household debt, but soaring house prices and anticipated U.S. key interest rate hikes seem to be weighing on the new administration.
Last week, Moon ordered related ministries to come up with comprehensive measures on household debt by August.
Although the President set this deadline, government officials said they will present measures as early as this month.
According to the Bank of Korea (BOK), the country’s household debt totaled 1,359.7 trillion won ($1,210 billion) in the first quarter, up 17.1 trillion won from a quarter earlier.
Many believe that the ballooning household debt poses a serious threat to Asia’s fourth-largest economy.
During the former administration, the government tried to spur the economy by easing lending regulations to boost the real estate market. Moon is set to take a different approach.
Rep. Kim Hyun-mee of the ruling Democratic Party of Korea (DPK), who has been nominated as land, infrastructure and transport minister, showed a glimpse of future policies. She said that the debt more than doubled during the previous two conservative governments -- it was 564 trillion won in 2008.
Rep. Kim stressed that household debt started to jump in 2014 and 2015 when it grew at double digit rates. She attributed the surge to then Finance and Strategy Minister Choi Kyoung-hwan’s policy of easing lending regulations.
Observers point out, however, that Korea should think of the possible side effects in drawing up and executing policies.
The government’s choice would include tightening banks’ loan assessment of qualification metrics of debt-to-income and loan-to-value, but it is also drawing concern that tightened lending rules may marginalize people in the low income bracket.
“The liberal Moon administration should try to contain rising household debt through strengthening regulations on the real estate market,” said a Seoul analyst who asked not to be named.
“If the real estate market dips too fast, however, the household debts could become more serious as demonstrated by the sub-prime mortgage crisis in the United States in the late 2000s. That’s the dilemma.”
Prof. Sung Tae-yoon at Yonsei University concurred.
“It is a very complicated problem to deal with the household debt and the real estate market at the same time. The government should not depend on direct price regulation such as capping rent prices,” Sung said. “Instead, it needs to stabilize house prices by providing more homes.”
Also casting problems on Moon’s efforts to rein in household debt are U.S. key rate hikes.
John C. Williams, president and CEO of the Federal Reserve Bank of San Francisco, last week concurred with most experts on three rate increases for this year. Citing good conditions favorable to the U.S. economy, he raised the possibility that the U.S. will raise the rate four times.
The market consensus is that the U.S. Federal Reserve will crank up its policy rate, June 15, to the 1 percent to 1.25 percent range, which will be similar to the current 1.25 percent in Korea.
This is prompting concerns of capital flight.
While freezing the policy rate at 1.25 percent last month, BOK Gov. Lee Ju-yeol said the central bank will not “automatically raise” the benchmark rate following any U.S. move. But observers point out that there would be pressure to do so.
The new government is also in a quandary because any rate hike would add trillions of won more in annual interest payments needed to be made by households.