"Korean Household Debt Highest in the World... Urgent Need to Consider Interest Rate Hikes and Total Volume Management"

[Asia Economy Reporter Sung Kiho] An analysis has revealed that the scale and growth rate of household debt in Korea are among the highest in the world. Additionally, as credit risks are increasing, there are calls for countermeasures such as raising the benchmark interest rate and managing the total debt volume.

Senior Research Fellow Shin Yong-sang of the Korea Institute of Finance stated this in the report titled "Current Status of Household Debt Risk and Proactive Management Measures," published on the 13th.

Senior Research Fellow Shin pointed out that Korea's household debt currently ranks highest globally in both nominal size relative to Gross Domestic Product (GDP) and growth rate. The ratio of household debt to nominal GDP rose from 83.4% at the end of 2019 to 90.3% at the end of the first quarter this year. This is a 27.6 percentage point increase compared to 62.7% at the end of 2008.

This growth rate is steep compared to advanced countries, where the household debt to GDP ratio, based on the classification criteria of the Bank for International Settlements (BIS), increased by 4.9 percentage points over 12 years, from 76.1% at the end of 2008 to 81.0% at the end of last year. The ratio of household debt to disposable income, an indicator of households' debt repayment capacity, also rose by 18.0 percentage points from the first quarter of last year to 181.1% at the end of the first quarter this year. This indicates a heavier burden in repaying debt.

He diagnosed, "The recovery speed of the domestic real economy is showing differences across industries recently," adding, "There are concerns about credit risks for vulnerable households and sectors around the time when monetary policy direction changes or government financial support measures end."

Senior Research Fellow Shin also emphasized, "To prepare for the possibility of credit risk materialization, systematic and proactive measures to minimize shocks are necessary," and pointed out that raising the Bank of Korea's benchmark interest rate should be considered first.

He stated, "From the perspective of managing risks across the entire economy, it is necessary to set and manage total volume targets not only for private sector debt as a whole but also for specific sectors such as household debt and real estate finance."

Accordingly, he suggested that separate total volume targets should be considered for parts with high concentration and risk, such as non-bank sectors like savings banks or specialized credit finance companies by industry, variable-rate loans and card loans by loan type in the banking sector, and loans to young people by age group.

He also stated that the criteria for applying regulations related to mortgage loans, such as whether the demand is "actual demand" or "speculative demand," should be clearly defined based on repayment ability rather than the presence or absence of housing.