Mortgage growth, housing boom are two ominous signs
What's going on now halfway across the world points to the risk of a debt-driven economy. Korea is different from Greece in many aspects but is similar to the birthplace of Western civilization at least in one way ― its middle class is rapidly disappearing buried under piles of debt.
The nation's seven largest banks saw their mortgage lending surge by more than 9 trillion won ($8 billion) in June from the previous month. The June figure marked the biggest monthly mortgage growth since 2010, owing mainly to robust ― rather overheated ― home purchases, which rocketed 115 percent from a year ago to 11,115 in Seoul alone.
Such a housing boom was predictable, or inevitable, given the record-low interest rate, soaring cost of renting a home, and loosened lending criteria by banks in cooperation with government policymakers who want to bolster the sagging economy by rekindling a property boom. In short, the government has created an atmosphere in which many families had to follow its "borrow-and-buy" (home) policy.
If this reminds people of the run-up to the U.S. subprime crisis, that's because it is the same. In 2007, the U.S. household debt amounted to $14 trillion, almost equal to its gross domestic product of $14.48 trillion. Korea's household debt has topped 1,100 trillion won, approaching its GDP of 1,428 trillion won as of 2013. Most private analysts, here or abroad, agree household debt is the weakest link in Korea's financial system. Especially alarming is its growth tempo; in the first quarter of 2015 alone, household debt grew 12.8 trillion won.
Government officials deny the housing bubble, citing relatively stable home prices, while saying that household debt is still at a manageable level. But few Americans had anticipated the subprime mortgage bubble would lead to the U.S. and global financial crisis of 2008. If home prices fall, the U.S. Federal Reserve hikes interest rates before long, and the disposable income of Korean households does not improve anytime soon ― as most private economists predict ― they will combine to produce large numbers of delinquents, loan defaults and foreclosures of homes in a few years time. Policymakers must think why property brokers advise would-be home purchasers to wait until 2017.
The time is long past for the Park administration's economic team to rein in the surge in mortgages both quantitatively by tightening lending rules, and qualitatively by limiting the use of mortgages more strictly. This is necessary because there is "polarization," too, even in mortgage lending: Some middle-class lenders spend the money on investing in other assets such as securities and multiple homes while the working poor borrow money to repay existing debts or use it for day-to-day living.
Even now, banking sources estimate more than 10 percent of household borrowers can fall into default, and the ratio will swell if economic conditions at home and abroad aggravate. Fortunately, Korea's fiscal health, gauged by the portion of government debt out of total national liability, was third-strongest among 16 countries surveyed by McKinsey & Co. in February, compared with the fifth-highest ratio of household debt. What all this shows is the government should do more to alleviate the difficulties of households' economy, through debt restructuring, better welfare and higher wages, drawing from the state coffer if necessary.
The increasing debt will make the financial system, and overall economy, more vulnerable to crisis. And, what meaning will the prosperity of the national economy have if 80 percent of its households are in economic tatters after all?
What's going on now halfway across the world points to the risk of a debt-driven economy. Korea is different from Greece in many aspects but is similar to the birthplace of Western civilization at least in one way ― its middle class is rapidly disappearing buried under piles of debt.
The nation's seven largest banks saw their mortgage lending surge by more than 9 trillion won ($8 billion) in June from the previous month. The June figure marked the biggest monthly mortgage growth since 2010, owing mainly to robust ― rather overheated ― home purchases, which rocketed 115 percent from a year ago to 11,115 in Seoul alone.
Such a housing boom was predictable, or inevitable, given the record-low interest rate, soaring cost of renting a home, and loosened lending criteria by banks in cooperation with government policymakers who want to bolster the sagging economy by rekindling a property boom. In short, the government has created an atmosphere in which many families had to follow its "borrow-and-buy" (home) policy.
If this reminds people of the run-up to the U.S. subprime crisis, that's because it is the same. In 2007, the U.S. household debt amounted to $14 trillion, almost equal to its gross domestic product of $14.48 trillion. Korea's household debt has topped 1,100 trillion won, approaching its GDP of 1,428 trillion won as of 2013. Most private analysts, here or abroad, agree household debt is the weakest link in Korea's financial system. Especially alarming is its growth tempo; in the first quarter of 2015 alone, household debt grew 12.8 trillion won.
Government officials deny the housing bubble, citing relatively stable home prices, while saying that household debt is still at a manageable level. But few Americans had anticipated the subprime mortgage bubble would lead to the U.S. and global financial crisis of 2008. If home prices fall, the U.S. Federal Reserve hikes interest rates before long, and the disposable income of Korean households does not improve anytime soon ― as most private economists predict ― they will combine to produce large numbers of delinquents, loan defaults and foreclosures of homes in a few years time. Policymakers must think why property brokers advise would-be home purchasers to wait until 2017.
The time is long past for the Park administration's economic team to rein in the surge in mortgages both quantitatively by tightening lending rules, and qualitatively by limiting the use of mortgages more strictly. This is necessary because there is "polarization," too, even in mortgage lending: Some middle-class lenders spend the money on investing in other assets such as securities and multiple homes while the working poor borrow money to repay existing debts or use it for day-to-day living.
Even now, banking sources estimate more than 10 percent of household borrowers can fall into default, and the ratio will swell if economic conditions at home and abroad aggravate. Fortunately, Korea's fiscal health, gauged by the portion of government debt out of total national liability, was third-strongest among 16 countries surveyed by McKinsey & Co. in February, compared with the fifth-highest ratio of household debt. What all this shows is the government should do more to alleviate the difficulties of households' economy, through debt restructuring, better welfare and higher wages, drawing from the state coffer if necessary.
The increasing debt will make the financial system, and overall economy, more vulnerable to crisis. And, what meaning will the prosperity of the national economy have if 80 percent of its households are in economic tatters after all?
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