World Economy

Surging S. Korea Household Debts Threaten Economy

Surging S. Korea Household Debts Threaten EconomySurging S. Korea Household Debts Threaten Economy

Household debt in South Korea is increasing at an alarming pace, as more people take out mortgages to buy homes. Economists say the government should control the level of household debt, which has risen to become the biggest threat to the economy.

According to local banks, the balance of mortgage loans at the country’s seven major banks — Kookmin, Shinhan, Woori, Hana, Nonghyup, IBK and KEB — stood at 319.9 trillion won ($290.6t) as of the end of February, a 3.4 trillion won increase from December, NewsNow reported.

This is more than 8.2 times when compared with last year when mortgage loans increased by 423 billion won for January and February.

Banks explain that more people seem to be buying houses with mortgages due to soaring jeonse prices. Jeonse is Korea’s unique property rental system in which tenants pay a lump sum deposit to a landlord at the start of a rental contract. The tenant gets the full deposit back at the end of the contract, which typically lasts two years.

 Steep Rise

However, over the past few years, jeonse prices have been rising steeply, prompting more people to consider buying a house. According to Kookmin Bank, the average jeonse price has risen to 70.6 percent of the housing price, the highest ratio ever. It means a jeonse tenant can buy a house and become a homeowner if he/she takes out a mortgage.

With more people choosing to buy, housing transactions totaled 79,320 nationwide in January, a 34.1 percent increase from a year ago.

However, the soaring mortgages are expected to increase household debt, which rose by 67.6 trillion won to a record1089 trillion won last year.

Economists warn that household debt could be a serious threat to the economy.

“Household debt is the biggest threat for Korea’s macroeconomy,” said Park Jong-kyu, a senior research fellow at the Korea Institute of Finance.

“The OECD also cited Korea’s household debt as a risk factor, but the government seems to be sitting idle.”

Economists explain that households are cutting spending due to the burden of debt, resulting in the domestic economy losing steam.

Each household’s average propensity to consume, or the percentage of its disposable income that was spent on consumption, fell to 72.9 percent last year, the lowest ever. “The increasing burden of paying back debt will deteriorate the household capacity for spending,” said Cho Young-moo, a senior economist at LG Economic Research Institute.

“Moreover, the interest rate may start to rise after the latter half of the year when the United States is expected to raise its key rate,” he said. “It is likely that household loans that have turned bad will become a social issue as more households fail to make payments.”