South Korea Household Debt to GDP Soars to Record High

Household debt in proportion to gross domestic product soared to a record high at the end of the third quarter last year, according to data from the Bank for International Settlements.

The Switzerland-based financial institution, said South Korea’s ratio of total household debt to GDP was 94.4% in September 2017, up 0.6 percentage points from the previous quarter. This was also an increase of 1.6 percentage points from the 92.8% at the end of 2016, Yonhap reported.

The household debt to GDP ratio has increased for 14 consecutive quarters since the second quarter of 2014, according to research conducted by the BIS. In that time period, this was the second-sharpest increase after that of China.

The BIS said Korea’s household debt-to-GDP ratio was the fifth-highest after Switzerland with 127.6%, Australia (120.9%), Denmark (116.8%), the Netherlands (106%), Norway (102%) and Canada (100.4%).

Korea’s household debt has been soaring since 2014 after the government began easing regulations on mortgages, with the Bank of Korea cutting its benchmark rate. Since August 2014, the BoK cut the key rate five times. The results were catastrophic. Housing price growth in Korea has already eased quite sharply since 2016 but household debt continues to rise rapidly.

The debt rose to a new record in 2017 with the amount including credit purchases hitting 1,450.9 trillion won ($1.3 trillion), up 8.1% from 2016, according to the BoK.

To cool the booming property market and soothe speculative trading, the President Moon Jae-in administration has introduced measures to slow debt growth and prevent overheating in the property market. The government is teaming up with relevant agencies to address the issue. It is concerned that the high level of debt, combined with higher interest rates, could cause vulnerable households to default.

In a related note, Fitch Ratings said the Korean economy expanded by a strong, above-trend 3.1% in 2017 due to supportive economic policies and financial conditions and by buoyant, albeit cooling, construction output growth. But the ratings agency is concerned that overall investment growth is likely to keep cooling, dragged down by construction.

“The slowdown in construction is being partly engineered by the authorities, who have been stepping up their efforts to cool the housing sector and address systemic housing risks. Measures include an increased capital tax gain on house sales and stronger requirements for loan-to-value ratios and debt-to-income ratios in certain areas (including Seoul),” it said in its report.