Korea's household debt has topped 2,000 trillion won for the first time. The steep rise in household debt is cited as a potential factor threatening the Korean economy, but experts are divided. Some say that while the total amount of household debt is large, multiple lending regulations make the risk of delinquency low. Others worry that as the rate hike cycle begins, the burden of principal and interest repayments on households will grow, acting as a drag on the domestic economy.
As of the end of the second quarter on the 26th, household credit balances stood at 1,999.8 trillion won, up 25.9 trillion won from the previous quarter, according to the Bank of Korea (BOK) and others. It was the largest increase in four years and nine months since the third quarter of 2021. Within household loans, mortgage loan rose by 12.2 trillion won, while other loans such as unsecured credit rose by 12.8 trillion won. The BOK analyzed that demand to buy dwellings before the end of the capital gains tax surcharge grace period, group loans, and demand for stock investment funds drove the increase in lending.
Household credit is a comprehensive indicator that shows the scale of domestic household debt. It is the sum of money borrowed from financial institutions and purchases made on credit such as credit cards. Experts say the chances of household debt escalating into an economic crisis are low when considering borrowers' repayment capacity and the soundness of financial companies.
Korea's household debt has a high share of mortgage loan, and in regulated area such as the Seoul metropolitan area, the loan-to-value (LTV) ratio is capped at 40%. Because of this, even if the borrower (the person taking the loan) cannot repay, financial institutions can recover the loan through auctions and the like, making it less likely to lead to financial institution insolvency.
Lee Hye-in, a senior researcher at Woori Finance Research Institute, said, "Korea's mortgages are seeing improved debt repayment capacity from the household income side, and tighter regulations than in major countries are in place, so credit risk appears low."
There are also many forecasts that, given Korea's rapidly aging demographic structure, household loans will increase for the time being and then reverse downward. Kim Mi-ru, Head of Team at Korea Development Institute (KDI), said, "If life expectancy remains flat while the share of older adults rises, the economy's overall capacity to supply funds will shrink, and the decline in the youth population could also reduce households' demand for funds," adding, "Within a few years, the household debt ratio will pass its peak and turn into a trend of decline."
In fact, the situation has improved from the past when considering the economic scale, the "denominator" of household debt. By Bank for International Settlements (BIS) standards, Korea's household debt-to-GDP ratio fell to 88.6% at the end of last year from 99.1% in the third quarter of 2021. In the Bank of Korea's flow of funds statistics, the household debt ratio in the first quarter of this year was 85.3%, down 2.9 percentage points from 88.1% in the previous quarter. Rapid increases in nominal GDP, helped by strong semiconductor exports and rising prices, have made the economy grow faster than debt. While aggregation standards differ, the direction is clear that the burden of household debt is coming down from its peak during COVID-19.
Rising household income also lowers the likelihood of household debt turning sour. According to the Bank of Korea, households' financial assets are 2.47 times their liabilities, the highest on record. This means households do not only carry liabilities but also hold substantial financial assets.
However, financial authorities consistently see Korea's household debt as larger than that of major advanced economies and a potential economic risk factor. As of the first quarter, among 31 countries in the Organization for Economic Cooperation and Development (OECD), household debt-to-GDP ratios were in the order of Switzerland (125.3%), Australia (112.7%), Canada (99.1%), the Netherlands (94.0%), New Zealand (90.1%), and Korea. It is higher than in the United States (68.1%), Japan (61.1%), and France (59.7%).
Yang Jun-seok, an economics professor at Catholic University, said, "Even if the household liability ratio to GDP declines somewhat, it is merely a shift from a very dangerous level to a slightly less dangerous one."
Another problem cited is that jeonse deposit loans are not included in international household debt statistics. As of the end of the first quarter, the outstanding loan balance of jeonse deposit loans at deposit banks was 165.6987 trillion won. If jeonse deposits were included in household debt statistics, Korea is estimated to overtake Switzerland for first place.
Carmen Reinhart, a professor at Harvard Kennedy School in the United States who visited Korea last year, assessed Korea's household debt as "higher than the advanced-economy average, and when factoring in borrowing related to jeonse, the official household debt ratio could be about 50% higher."
The biggest reason household debt is seen as risky lies more in its impact on economic growth than in financial firm insolvency. According to the Bank of Korea, when household debt to GDP exceeds about 80–85%, the negative effects of debt increases on consumption and growth intensify. Once household debt exceeds a certain level, more of earned income goes to principal and interest payments, reducing consumption.
Another risk factor is that unsecured credit has risen amid the recent "bittoo (borrowing to invest)" frenzy. Other loans including unsecured credit increased by 5.3 trillion won in May and 3.8 trillion won in June this year. As stock prices surged steeply in the second quarter and bittoo spread, general unsecured loans and negative-balance accounts grew rapidly.
Shin Yong-san, a research fellow at Korea Institute of Finance, said, "The high level of household debt and the burden of principal and interest payments are eroding the room for a domestic demand recovery," adding, "Adjusting the scale of household debt to an appropriate level is essential to restore the economy's overall growth potential."