Household debt to continue shrinking in 2nd half

Customers sit at a commercial bank's loans counter in Seoul on July 13. Yonhap

By Anna J. Park

Amid soaring key interest rates and a sluggish housing market, the country's household debt is forecast to continue on a downward path in the second half of this year, according to financial market analysts Sunday.

According to data compiled by the Financial Services Commission (FSC), the country's aggregate household debt decreased by 800 billion won ($603 million) to 1,060 trillion won, as of the end of June.

It was the first biannual decrease since the FSC began compiling such data in 2015. The amount of household debt had been increasing fast, particularly since the outbreak of COVID-19 in 2020. In 2020, the annual household debt increased by 8 percent throughout the year, while the annual increase rate slowed to 7.1 percent in 2021.

Although the rate of increase in household debt slowed during the previous year, the aggregate debt amount actually logged a net reduction in the first half of this year, due to a series of interest rate hikes from both inside and outside of Korea.

It is estimated that local households' burden from borrowing loans increased by 24 trillion won during the past 10 months. The pressure from household debt is expected to increase during the second half of the year, as additional interest rate hikes are almost a certainty during the next six months.

The Bank of Korea (BOK) is expected to raise the key interest rate by another 0.25 percentage point or 0.5 percentage point during the bank's Monetary Policy Board meetings slated for August, October and November.

If the nation's key interest rate rises to 2.5 percent or 2.75 percent by the end of the year, loan interest rates at banks could possibly reach up to seven or eight percent, placing a massive burden on borrowers.

In addition to the increased cost of loans, the implementation of the household debt service ratio (DSR) regulation from July would further function as an averting factor when it comes to household debt. As the DSR refers to a ratio of total household debt payments to total disposable income, the strengthened DSR regulation on households would limit how much each household can borrow based on their income level.

Also, market participants' general expectation that domestic housing prices would fall in the future also plays an important factor in slowing down demand for mortgage loans.

“As a series of interest rate hikes lead to the increase of interest paid on loans, the stunted household debt growth rate is not likely to be resolved anytime soon,” Jun Bae-seung, analyst at eBest Investment & Securities, highlighted.