Next gov't faces daunting task in curbing household debt

A passerby walks past an advertisement for housing loans posted by a commercial bank in Seoul in this December 2024 photo. Newsis

The new administration should not let unwarranted optimism for falling benchmark interest rate and growing investor interest in homes and stocks further increase household debt, economists and market analysts said Monday.

The warning comes as outstanding household loans extended by five major commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH NonghHyup — totaled 747.29 trillion won ($542.18 billion) as of Thursday.

The amount marked the fourth month of consecutive increases in household debt, which has long been regarded as the “time bomb” for the Korean economy.

This is because the ratio of such debt to gross domestic product (GDP) has been notably higher compared to other major economies.

According to the most recent update from the Bank of International Settlements (BIS), the ratio for Korea stood at 91 percent in the second quarter of 2024.

In comparison, the ratio averaged at 68.9 percent for advanced countries.

The growing household debt was partly attributable to the Bank of Korea’s (BOK) monetary easing cycle, with the base rate falling to 2.5 percent on Thursday, to mark the lowest level in nearly three years.

The pace of monthly increase in new loans became steeper, and over 6 trillion won was estimated to be taken out by households from financial firms nationwide from May 1 to 29.

The estimated amount was the highest since October 2024, when the figure hit 6.5 trillion won.

The BOK’s monetary shift is aimed at spurring an economy that faces an increasingly pessimistic outlook and is projected to grow less than 1 percent this year.

The central bank's monetary easing is feared to backfire, according to experts, as households have been taking out more loans from banks to buy homes at a lower borrowing rate.

The home buying spree, particularly in Seoul, was accelerated by rampant speculation that housing prices would rise under the new government after the presidential election on Tuesday.

“Under the circumstances, the new government is urged to work with the BOK and make sure a lowered rate does not end up in reckless borrowing from households,” said Shin Se-don, professor emeritus of economics at Sookmyung Women's University.

“A failure to adequately address issues on household debt would result in higher household debt-to-GDP ratio, which would exacerbate the growth slowdown.”

Stock investment frenzy

While an upward trajectory on the stock market is generally considered a plus factor for the economy, experts said such a trend could backfire if investors heavily borrow money to buy stocks and the market tumbles suddenly.

“The risks of up and down always remain on the stock market, and making big bets on stocks with borrowed money can be fatal,” said Jung Eui-jung, head of the Korean Stockholders' Alliance. “The failure means stock buyers, most of the retail investors, will not able to pay off principal and interests and thus deteriorate household debt.”

Yoo Ho-lim, a professor of taxation at Kangnam University, said investment frenzy is “more foreseeable” considering the benchmark KOSPI, after starting below the 2,400-point level at the start of 2025, is now well above 2,600.

The professor also noted that, due to market investment, that the KOSPI may soon surpass the 3,000-point milestone, over pledges from major presidential candidates to boost undervalued Korean stocks.

“Despite such an optimistic outlook, the global economic uncertainties, especially stemming from an unpredictable Donald Trump administration, can deal a blow to the domestic stock market,” Yoo said.

Asking not to be named, a researcher from a private economic think tank pointed out that investors are increasingly taking out loans to buy cryptocurrencies, driven by major presidential candidates’ pledges to foster the cryptocurrency market.

“The volatility associated with this market has been far higher than stocks and other conventional means of investment,” he said. “The new government should let the corresponding investors think over when using someone else’s money to buy these risky assets.”