Surging Household Debts and Its Countermeasures

Despite the current sluggish economy and gloomy circumstance of South Korea, recently household debts keep rising. According to the recent press release from BOK (Bank of Korea), household debts surged up to KRW 876.3 trillion, the highest record so far. As of the end of June, the balance of household debts increased by KRW 18.9 trillion during 2Q while only 10.4 trillion in 1Q, which contributed to mark the highest level of household debts.

The recent rising household debts are allegedly fueled by mortgage-related loans and overdraft. Also home lease, better known as ‘Jeonse’ in Korea, prices sustainably continue to rise over the period. Current tenants are facing the demand of increasing lease payment to renew the lease contract with the owner. Also new tenants feel a sharp pinch with higher price than they expected when they planned out at the first place. Struggling economy is giving a hard blow for self-hiring employers as well. In order to make the ends meet, they are in need of taking out more loans from bank and other financial institutions these days. Some turns out to invest their loans in currently highly volatile stock market.

 

Rising debts are becoming a heavy burden for individual households since more loans bring a relatively sharp increase of interest payment over their income. Based on the recent study from Statistics Korea, each household, more than 2 persons per household, needs to endure their monthly interest payment up to KRW 86,256 in average, which is equivalent to KRW 1,035,072 per annum. Compared to the same period in 2010, the figure has surged more than 11.4%, which is significantly high growth for the period. Without a doubt, it is a matter of course that the financial burden of unstoppable rising household debts is to keep growing without an effective countermeasure.

Obviously the financial officials are aware of the current situation of amounting household debts and expect to implement its countermeasure in advance to prevent a possible financial meltdown previously occurred in early 2000. Theoretically the most effective countermeasure of this rising household debts are simply raising a key interest rate. However, this simple fiscal economic policy measure is hard to sell this time around because it will deteriorate overall economic condition even worse with more burden to household, which lead them to tight the budget and less spending. Furthermore, the nation’s consumer price index, a major gauge of inflation, reached to 5.3% from a year earlier, the largest gain in three years and expects to stay in mid- 4% for the last of year. Clearly annual GDP does not make any difference, either. The government cautiously mentioned that they might need to revise the economic outlook for this year under the current circumstance. Therefore, any austerity measure against the current surge of household debt might make the situation worse.

 

In an effort to reduce the level of household debts, the financial regulators repeatedly sent an early signal to local banks that banks should be able to tight their loan policy and practices for a couple months so far. However, the situation does not seem to reduce the increment of debts as whole. The financial regulators are now considering additional measures to limit loan extension after observing the trend in the coming weeks, especially ahead of the Chuseok, Korean Thanksgiving holiday in September.

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