[Consecutive Defeats Debt Measures-②] Housing Price Surge - Yeongkkeul - Vicious Cycle of Expanding Insolvency... It Hurt More Because It's Youth

Fear of Sudden Poverty Sparks Debt Investment Trend
Half of New Securities Accounts Held by Youth
Loan Volume Surges Since COVID-19
Interest Rate Hike Signals Imminent Crisis

[Asia Economy Reporters Kwangho Lee, Kiho Sung] Kim Seong-guk (33, pseudonym), who runs a restaurant, purchased an apartment in Goyang-si, Gyeonggi-do, for 400 million KRW last May as a newlywed home. He took out a 200 million KRW mortgage loan and covered the remaining funds with a credit loan and money borrowed from his parents. Hearing from acquaintances who made money investing in stocks and cryptocurrencies, Kim also opened a negative balance account and borrowed an additional 100 million KRW. In other words, he leveraged almost all of his house price and investment funds by 'Yeongkkeul' (pulling together all his resources). Kim sighed, "Due to social distancing measures from COVID-19, business was restricted and sales were halved. I couldn’t just sit idly by, so I recklessly took out loans to try to make money, but the interest burden keeps increasing, and I lose sleep every night."

Despite more than 20 debt policies over the past decade, the rapid increase in household debt has not been curbed, and the core risk factor emerging in the Korean economy is the youth population. The debt of young people who borrowed recklessly out of fear of becoming 'sudden paupers' accounts for one-third of total household debt. Although they have low income and assets and are the most vulnerable to market shocks, the scale and speed of their debt growth far exceed those of other age groups. Concerns are rising that if interest rates rise further and total household debt regulations tighten, leading to mass defaults, this could become a time bomb for the Korean economy.

Investing Recklessly Like Moths to a Flame Despite Inability to Repay

According to data on 'Bank Mortgage Loan Status by Age Group' submitted by the Financial Supervisory Service to Jang Hye-young, a member of the National Assembly’s Planning and Finance Committee from the Justice Party, from the second quarter of 2017 to the first half of this year, new bank mortgage loans totaled 579.34 trillion KRW. Of this, the youth group’s new loans amounted to 257.7367 trillion KRW, accounting for 44.5% of the total. Half of the new mortgage loans issued since the Moon Jae-in administration began were taken out by young people. During the same period, the outstanding mortgage loan balance for the youth increased by 57.7%, more than double the overall mortgage loan balance growth rate of 28.5%.

Especially after COVID-19, the pace of increase in youth household debt has been very steep. According to the Bank of Korea, the youth household debt ratio reached 26.9% as of the second quarter. The growth rate during this period was 12.8% compared to a year earlier, 5 percentage points higher than the 7.8% increase in other age groups. They pulled funds from jeonse deposits and credit loans, which increased by 21.2% and 20.1% year-on-year, respectively. The industry estimates that a significant portion of these credit loans were for investment purposes such as stocks and cryptocurrencies.

In fact, according to the 'Credit Trading Loan Status of 10 Major Securities Firms' obtained by Min Hyung-bae, a member of the National Assembly’s Political Affairs Committee from the Democratic Party, the credit loan balance for those aged 19 to under 29 in the second quarter was 532.4 billion KRW, a 4.3-fold increase from the end of 2019. The total credit loan balance across all age groups was 19.8824 trillion KRW, a 2.6-fold increase, making the youth increase significantly higher. This is also confirmed by data received by Jang Hye-young from the Financial Supervisory Service. In the first half of this year alone, loans taken out by people in their teens to 30s from securities firms for stock investment purposes reached 38.7 trillion KRW, about 68% of last year’s annual new loan amount.

Jang said, "Of the 21.15 million newly opened securities accounts this year, about half were held by young people," adding, "I am concerned that young people are recklessly borrowing to invest, which could increase life instability due to price fluctuations." A Bank of Korea official also warned, "Since young people have lower income levels than other groups, they could be at risk if asset prices adjust."

Interest Rate Hikes in Full Swing... Unable to Pay Even Interest, Let Alone Principal

Experts expressed concern that most youth loans are reckless investments made with borrowed money (debt investment), and that with the full-scale interest rate hikes, the financial structure of young people will deteriorate rapidly. Debt investment suppresses consumption and inevitably affects the entire economy, so active government measures are needed.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "Recently, debt-financed investment among young people has been increasing, so government authorities should focus on how to resolve this issue." Professor Kim Sang-bong of Hansung University’s Department of Economics emphasized, "Considering various financial conditions, it is time for interest rate hikes. However, since interest rates are likely to continue rising next year, young people who have taken out large loans for debt investment and 'Yeongkkeul' should proactively prepare by reducing their loans."

Since it is difficult for young people to reduce loans quickly, active policies such as refinancing loans and extending principal installment repayment periods were also recommended. Professor Seo Ji-yong of Sangmyung University’s Department of Business Administration said, "With the base interest rate hike becoming a fait accompli, refinancing loans should be activated to reduce borrowers’ burdens," adding, "Since refinancing loans do not increase the total loan volume, active policies such as providing incentives to relevant institutions are necessary."

Meanwhile, the government is reportedly planning to include management measures for young people in the high-intensity household debt measures to be announced right after the national audit. Earlier, Financial Services Commission Chairman Ko Seung-beom said, "I am aware that the increase in household loans among young people has been higher than other age groups recently," and added, "We will continue efforts to enhance the effectiveness of household debt measures and actively explore and implement additional measures using all available policy tools if necessary."