A forecast from a national policy research institute suggests that the household debt ratio, which has been on the rise for over 20 years, will transition into a decline within a few years. Kim Mi-ru, a researcher at the Korea Development Institute (KDI), analyzed on the 5th that "the household debt ratio will turn downward within a few years due to the slowdown in the increase of life expectancy and the deepening of population aging."
◇ "Household debt compared to GDP rises with increased life expectancy"
Kim noted that the household debt ratio compared to domestic gross product (GDP) in Korea has continuously risen since the late 1990s, excluding the periods immediately after the IMF financial crisis and during COVID-19. He analyzed that "the increase in household debt seems to be attributed more to structural factors than short-term economic factors," and stated that "the increase in life expectancy and changes in population structure have significantly impacted the rise in household debt."
According to Kim, as life expectancy increases, the motivation for households to accumulate assets strengthens, leading to a tendency for the household debt ratio to rise. In fact, when life expectancy increases by one year, the household debt ratio compared to GDP is found to increase by about 4.6 percentage points (p). Meanwhile, a higher old-age dependency ratio tends to reduce the household debt ratio.
He also pointed out the differences in asset accumulation methods by age group. The younger generation mainly increases household debt to acquire residential assets, while the middle and older age groups, who already own dwellings, tend to accumulate additional assets primarily in financial assets rather than through residential transactions, due to the high transaction costs.
He added, "When comparing national debt data from 2013 and 2023, real liabilities per capita for the young and middle-aged population have increased, while real liabilities for the elderly have actually decreased." He continued, "Among the increase in household debt ratio compared to GDP (33.8% p), 28.6% p can be attributed to increased life expectancy and 4.0% p to changes in population structure."
◇ "Household debt will decrease within a few years due to population aging"
Kim predicted, "In the future, demand for real estate borrowing among the younger generation will decrease, and as asset consumption among the elderly increases, the household debt ratio compared to GDP may gradually decline." He explained that rapid population aging and a slowdown in the increase in life expectancy reduce the funding supply capabilities of the elderly, while the decline in the youth population also shrinks household funding demand.
According to Kim's analysis, if the proportion of the young and middle-aged population (ages 25 to 44) decreases by 1 percentage point and the proportion of the elderly population (ages 65 and older) increases by 1 percentage point, the household debt ratio compared to GDP is expected to decrease by about 1.8 percentage points.
He said, "When the population of the young and middle-aged is large, borrowing demand increases, leading to a rise in household debt, but if low birth rates continue and the proportion of the elderly expands, funding demand will decrease and household debt will also decline."
He further stated, "Life expectancy in our country is expected to increase from 84.5 years to 90.9 years by 2070, which could raise the household debt ratio compared to GDP by 29.5 percentage points, but the changes in population structure due to aging could lower it by 57.1 percentage points," adding, "As a result, by 2070, the household debt ratio compared to GDP is expected to decrease by 27.6 percentage points."
◇ "Need for linkage with non-financial policies such as labor market flexibility"
Kim emphasized that for the stable management of household debt, it is important to link financial policies with non-financial policies such as labor market flexibility and resolving asset inequality.
He explained, "Despite the increase in life expectancy, many workers are ending up in low-wage and unstable jobs post-retirement," adding, "This strengthens households' motivations for asset accumulation, ultimately leading to an increase in household debt." He further noted, "Introducing a flexible wage system centered on job performance could contribute to alleviating the rising trend of household debt."
Kim also pointed out that since changes in population structure influence the trend of household debt ratios, a household debt policy centered on simple total regulations could lead to unnecessary friction. He stressed that "the increase in household debt ratios is a natural change in saving and borrowing behavior due to changes in population structure" and that policies should be designed and implemented with a focus on evaluating the repayment capabilities of borrowers and maintaining the macro-prudential health of financial institutions, rather than overly restricting cash flows.