[News Focus] Korea facing significant household debt risks: OECD data

SEJONG -- The level of household debt in South Korea remains high, according to the latest research from the Organization for Economic Cooperation and Development.

Korea’s 184 percent ratio of household debt to disposable income in 2019 placed the country eighth from the top, meaning debt levels were higher only in seven countries. Data was available for only 33 of the OECD’s 37 member nations, and was compiled in 2018.

The figure means that a Korean household with disposable income of 70 million won ($58,000) would typically have 128.8 million won worth of debt.

Only nine of the countries studied had ratios surpassing 150 percent.

The ratios for Japan and the US stood at 107 percent and 105 percent, respectively. Colombia, which became an OECD member this year, posted only 47 percent.
 

Latvia and Hungary recorded the lowest figures, both in the 42 percent range. The next-lowest were Colombia, Lithuania (50 percent), Slovenia (57 percent), Poland (63 percent), and the Czech Republic and Chile (both 70 percent).

Other countries with figures below 100 percent included Italy (87 percent), Austria (90 percent) and Germany (95 percent), which means their disposable income exceeded their household debt.

Among the English-speaking countries, Australia recorded 217 percent, Canada 182 percent, the UK 141 percent and New Zealand 122 percent.

The three with the highest ratios of household debt to disposable income were Denmark (282 percent), the Netherlands (239 percent) and Norway (239 percent). Figures for Switzerland (223 percent) and Sweden (189 percent) were also relatively high.

Market insiders say the Bank of Korea played a significant role in failing to rein in loans to the household sector. The Korean central bank’s Monetary Policy Committee cut the benchmark interest rate by 125 basis points within only two years during the previous Park Geun-hye administration.

The Park administration further pushed for double-track deregulation, under which the loan-to-value ratio as well as the debt-to-income ratio were eased for borrowers.

The 2014 deregulation was mostly intended to boost the economy by prompting households to purchase apartments via mortgages on relaxed lending terms.

The benchmark rate, which reached 2.5 percent per annum in July 2014, was cut to 1.25 percent in June 2016 through five incremental cuts.

The eased rules and record-low rates were regarded as a historic opportunity for all -- ordinary households, first-time home buyers and multiple-home owners. They rushed to commercial banks to take out mortgages and gathered at real estate agencies, particularly in Seoul and satellite cities.

The Moon Jae-in administration, which took office in May 2017, has also failed to put the brakes on the mounting debt levels.

As a result, Korea’s household debt -- outstanding financial sector loans plus outstanding credit card payments -- topped 1,500 trillion won as of December 2018.

Its household debt increased by 526 trillion won, or 48.4 percent, in only five or six years -- from 1,085 trillion won as of December 2014 to 1,611 trillion won as of March 2020.

The huge sum of Korea’s outstanding household loans, including mortgages, is a core factor restricting consumption in the household sector and ultimately hampering macroeconomic growth.

Despite the spike in apartment prices, ordinary households -- those owning only one apartment and indebted to commercial banks -- inevitably have a restricted ability to spend unless they choose to realize capital gains by selling their homes and moving to cheaper accommodations.

Korea’s key interest rate has been set at the historic low of 0.5 percent per annum since May 28 in the wake of the novel coronavirus.

By Kim Yon-se (kys@heraldcorp.com)