A study has emerged indicating that the government's household liability policy should focus on managing individual borrowers' soundness without imposing a limit on total liabilities. This is due to the significant impact that demographic changes, such as increasing life expectancy, have on the rising household liability in South Korea.
Researcher Kim Mi-ru of the Korea Development Institute (KDI) presented this argument during a session titled "The Impact of Demographic Changes on Household Liabilities and Implications" at the special session II of the 2025 Joint Economic Conference held at Hannam University in Daeduck on the morning of the 6th.
Kim noted, "As life expectancy increases, the motivation for households to accumulate financial and dwelling assets strengthens," adding, "This results in lower real interest rates and rising real estate prices, which leads to increased household liabilities."
If life expectancy increases by three years, real estate assets are projected to rise by 0.61%, while household liabilities in relation to GDP are expected to increase by 24.99%, according to Kim's analysis.
He explained that "When life expectancy increases without significant changes in retirement age, the demand for asset accumulation for retirement preparation rises due to a longer survival period after retirement," stressing that "generally, households want to maintain a certain consumption level over their lifetime based on expected lifetime income."
He further stated, "This creates an environment where economic entities seeking to borrow funds can do so more easily than before" and explained that "lower real interest rates could lead to increased corporate liabilities or rising net external financial assets."
Regarding the factors for lower real interest rates and increased corporate liabilities, Kim explained, "When life expectancy increases, those aged 45 and above accumulate assets focused on financial assets, while those under 45 accumulate assets focused on dwellings, leading to an increase in net worth for all entities while also increasing liabilities."
However, he predicted that as low birth rates and aging continue to decrease the ratio of the younger generation to the retired elderly, household liabilities relative to GDP would gradually decline.
Kim asserted, "As retired elderly individuals consume their accumulated assets to maintain their living standards, the overall capital stock increase of the economy will slow down," adding, "Additionally, the number of younger individuals acquiring real estate through borrowing will also decrease, contributing to a reduction in household liabilities."
Based on these research findings, Kim emphasized, "The government's household liability management policy targeted at total management may exacerbate resource allocation distortions within the economy" and predicted that household liability levels will naturally decrease over the medium to long term due to demographic changes.
He further stated, "It is necessary to manage household liabilities with a focus on individual borrower soundness" and suggested that "debts should be managed primarily based on the debt service ratio (DSR) of individual borrowers, but when calculating the DSR, current and future income trends should also be considered and reflected in stress DSR regulations." He added, "Therefore, when calculating the stress DSR, it is important to properly reflect the expected duration of future economic activities and income forecasts."
Kim also mentioned, "Policies other than financial policies can also influence household liability trends" and noted that "increased labor market participation of the elderly due to rising retirement ages will help reduce household liabilities by decreasing the motivation for households to accumulate assets."
He emphasized, "Factors such as a decrease in real estate prices through easing metropolitan area concentration and resolving asset imbalances through enhanced social mobility could also contribute to reducing household liabilities."