An analysis has emerged suggesting that if an economic shock occurs, household income decreases, and asset prices fall, the proportion of households in arrears may double. In particular, the proportion of arrears increases more significantly for self-employed individuals, daily workers, and elderly households.
The Bank of Korea noted in its 'Financial Stability Report' on the 24th that the scale of household debt has been slowing, aided by the government's macroprudential policies and persistent tightening of monetary policy. However, it evaluated that the repayment burden has increased as loans with high loan-to-value (LTV) ratios have recently risen, leading to an increased loan-to-income (LTI) ratio for low-income borrowers.
In response, the Bank of Korea analyzed the impact of macroeconomic shocks on the soundness of household debt. Specifically, it estimated changes in indicators if the economic growth rate adjusted from 1.8% to -0.5%, the unemployment rate rose from 2.7% to 3.6%, and housing prices shifted from a 0.9% increase to a 5.4% decrease.
The analysis predicted that the proportion of households in arrears among borrowing households would rise to 5.1%. This is twice the level of the arrears proportion of 2.5% observed last year. Households that took out loans with high LTV ratios, as well as self-employed individuals, daily workers, and elderly households, showed a more significant increase in the proportion of arrears. Households with an LTV ratio exceeding 60% saw a 4.0 percentage point (pp) increase in arrears under shock conditions, self-employed individuals saw a 2.5 pp rise, and the elderly experienced a 2.3 pp increase.
When comparing the effects of macroeconomic shocks on the soundness of household debt based on loan characteristics, households with variable-rate loans exhibited a greater increase in the proportion of arrears compared to those with fixed-rate loans. Additionally, households with non-bank loans, as well as those with other loans rather than housing collateral loans, reacted more sensitively to the shocks.
The Bank of Korea judged that "examining the potential risks of household debt from the perspective of financial and economic vulnerabilities reveals concerns about constrained consumption due to increased debt dependence among low-income groups. Moreover, there is a likelihood of experiencing repayment difficulties if income decreases following retirement, as debt reduction is delayed primarily among the elderly."
However, the Bank of Korea stated that "considering the qualitative changes in household debt thus far, the likelihood of financial stability being undermined in the short term is not high." It added, "It is necessary to be mindful of potential vulnerabilities to income and asset price shocks in the medium to long term." Furthermore, it emphasized, "We must be cautious that the extension of loan maturities does not become a risk factor through deepening mismatches in the maturity of assets and liabilities at financial institutions."