If interest rates rise by 1 percentage point, the probability of arrears on loans among high-borrowing households that acquired dwellings—what could be called "real estate all-in"—increases by 0.81 percentage point, according to a Bank of Korea analysis released on the 7th. Compared with the actual arrears ratio (2.01%) for households owning dwellings as of the end of last year, the increase is considerable, indicating vulnerability to higher rates, the Bank of Korea said. High-borrowing households that acquired dwellings refers to the top 10% of households whose principal and interest repayment burden relative to income rose the most because they took out large loans when purchasing dwellings.
The Bank of Korea released a report the same day titled "Risk assessment of household debt using a household DB." The Bank of Korea conducted the analysis based on data that capture the liabilities, assets, income, and expenditure information of 2.06 million households. Until recently, analyses were conducted on an "individual" basis, but this time they centered on "households." The Bank of Korea said, "The household DB has high representativeness, as not only the population size and regional distribution but also the regional distribution of the sample are very similar to the population census."
In high-borrowing households that acquired dwellings, if one household member falls into arrears on a loan, the probability that another member will be in arrears within a year is 8.8%. On the same basis, this is 1.9 times the level of existing households owning dwellings (4.6%). This means that for high-borrowing households, the credit risk from rising interest rates is more likely to spread beyond individuals to all household members.
However, when broadening the analysis to all households owning dwellings, when interest rates rise by 0.25 percentage point, the arrears ratio (the number of borrowing households divided by households with an arrears case) increased by 0.27 percentage point. The Bank of Korea said, "For borrowing households as a whole, the arrears ratio generally remains stable even when interest rates rise." However, for the lowest income quintile, the arrears ratio rose by 0.48 percentage point 12 months after the rate hike, and for the second quintile it rose by 0.4 percentage point, showing higher sensitivity.
Meanwhile, as of last year, an estimated 11.1% of households with liabilities reduced consumption due to the burden of debt repayment. A pattern emerges of consumption declining when the debt service ratio (DSR) exceeds 46%, meaning 11.1% of households with liabilities last year had a DSR above 46%.