Household debt has become a crucial issue for the South Korean economy, prompting financial authorities to devise measures to curb it. However, the upward trend in debt continues unabated. According to the “October Household Debt Trends” report released by the Financial Services Commission on the 11th, household loans across all financial institutions increased by 6.6 trillion won month-on-month last month, surpassing the 5.3 trillion won increase in September. Of the increased household loans, 5.5 trillion won were mortgage loans.
Last month, second-tier financial institutions such as credit card companies, insurance companies, community credit cooperatives, and savings banks spearheaded the household loan increase. Due to major banks significantly raising their lending thresholds under pressure from financial authorities, bank household loans only increased by 3.9 trillion won last month. People who couldn’t secure loans from banks turned to second-tier financial institutions to purchase homes. The increase in loans from these institutions reached 2.7 trillion won last month alone, the highest in two years and eleven months since November 2021. The increase in mortgage loans from second-tier financial institutions alone amounted to 1.9 trillion won.
This is a typical “balloon effect” where loan demand shifts from banks to second-tier financial institutions. As long as the liquidity in the market continues to focus on real estate, the rise in household debt is difficult to curb. Moreover, the proportion of policy loans within bank mortgage loans has become larger. Stepping Stone and Supportive loans increased by 3.4 trillion won last month, accounting for more than half of the household loan increase. Although Bogeumjari loans decreased by 1.3 trillion won, the substantial increase in Stepping Stone loans resulted in a total policy loan increase of 2.1 trillion won. Policy loans have been increasing by an average of 2 trillion won per month since May.
Even if banks reduce mortgage loans due to pressure from financial authorities, policy loans, which are subject to different conditions, are unaffected. Last month, the increase in banks’ self-originated mortgage loans was 1.5 trillion won, which is less than the policy loans (2.1 trillion won). There is growing confusion as bank loan regulations aimed at curbing surges in housing prices and household debt collide with policy loans that stimulate rising home prices. Professor Andong-hyun from Seoul National University’s Department of Economics remarked, “Policy loans are essentially the government saying ‘borrow to buy a house,’ presuming that house prices will continue to rise. It’s nonsense to only pressure banks and leave policy loans untouched in a situation where household debt needs to be reduced.”
Household debt is already at a risky level. According to the International Finance Association’s Global Debt Report, South Korea’s household debt-to-GDP ratio was 98.9% in the first quarter. Among the 59 countries surveyed, South Korea ranked fourth after Switzerland (126%), Australia (108.9%), and Canada (101.2%). The ratios in the U.S. and Japan were only 71.8% and 63%, respectively.
This negatively impacts domestic consumption. As interest burdens increase, the actual amount of disposable income decreases. The Bank of Korea stated in its Monetary Policy Credit Report released in September that “a high household debt ratio could act as a structural factor that constrains consumption,” indicating that the correlation between household debt and private consumption has been negative since the debt ratio surpassed 80% in 2014. This implies that as debt increases, consumption decreases.
The Bank of Korea’s decision to lower the base interest rate also poses a burden. Although the Bank cut the base rate once in October, concerns that rate cuts could stimulate real estate purchases through loans have made it cautious about further reductions this year. Governor Lee Chang-yong noted on the 5th that “the proportion of non-financial assets such as real estate in Korean households is 80%, significantly higher than the U.S. (37%). Excessive capital concentration could trigger a financial crisis. In recent monetary policy decisions, balancing growth and financial stability has become much more critical. Consideration must be given to the possibility that a rate cut could expand household debt and exacerbate structural problems in the long term.”
The government is in a difficult situation to take appropriate measures. In the case of policy loans, they are tied to policies like low birth rates and welfare for low-income families, making it impossible to reduce them indiscriminately. Instead, the government plans to ease the income requirements for newborn-specific loans from December 2 (annual income 130 million won to 200 million won). Most policy loans are managed by the Ministry of Land, Infrastructure, and Transport, while household loans are overseen by the Financial Services Commission, leading to a lack of a centralized control tower, which is one reason for inconsistent policies.
However, within the government, there is an expectation that household loans will slow down starting this month, as the volume of housing transactions has decreased for two consecutive months since August. Typically, housing transactions are reflected in loan figures with a two-to-three-month delay. The financial authorities convened a household debt monitoring meeting with major banks and second-tier financial institutions and requested second-tier financial firms to submit management plans as banks do. Each company must develop its plan for managing household loans for the remainder of the year and establish the extent to which they will increase next year. The Financial Supervisory Service also announced onsite inspections for community credit cooperatives and agricultural cooperatives.