[Leverage's Counterattack] Fear of Sudden Poverty and Debt Investment... It Would Have Been Better If Loans Were Harder to Get

Fear of Interest Rate Hikes During Asset Price Decline Phase "Concerns Over Increase in Credit Delinquents"

[Asia Economy Reporters Seon-ae Lee, Hye-min Kim, Dong-pyo Kim]

A in their 20s, a job seeker, took out a 3 million won loan through a card loan and jumped into the cryptocurrency market but lost most of the principal due to the downturn. Afterwards, A took out an additional 3 million won loan from an internet-only bank and ventured into stock investment. Although they started buying mainly large-cap stocks, the current account return rate is around -30% due to the market plunge. A, who barely manages to pay the loan interest through part-time jobs, said, "I regret jumping into stock and coin investments with borrowed money without realizing how scary the market is." Pushed to the edge, A even lamented the environment where loans are easily accessible to people in their 20s and 30s. They added with a bitter smile, "Isn't it because the loan accessibility for the younger generation has become relatively easier that they led the Donghak Ant Movement?"

B, in their 30s working in Seoul, gathered all possible loans including mortgage loans, credit loans, and company loans about a year ago to purchase an old apartment in Gyeonggi Province. Of the 340 million won purchase price, 240 million won (70%) was loaned. Meanwhile, the house price rose by more than 100 million won, but B cannot hide their frustration as they face both interest rate hikes and falling house prices simultaneously. The house price dropped by 30 million won this year, while the credit loan interest rate rose from the low 2% range to the mid-3% range. B lamented, "The interest burden will keep increasing, and if the house price continues to fall, it will be hard to cope."

◆Fear of sudden poverty and easy loans= The main players driving price increases in the stock, cryptocurrency, and real estate markets after COVID-19 are people in their 20s and 30s. The reason for taking on debt to invest (Yeongkkeul, meaning 'pulling together one's soul' and Bit-tu, meaning 'borrowing to invest') is rooted in the fear of becoming 'byeorakgeoji' (sudden poverty) if they do nothing. Even working hard does not guarantee a stable future, and seeing people with assets making money without working has led more young people to decide to invest even if it means overextending themselves.

After witnessing the stock market crash and rebound post-COVID-19 and recognizing that savings and deposits are no longer effective financial tools due to low interest rates, the tendency to borrow to invest has increased. The environment where loans are easily accessible ironically encouraged reckless investments. In fact, government credit loan regulations focus on high-income earners and large loans, making small loans for people in their 20s and 30s relatively easy to access. The emergence of internet-only banks such as KakaoBank, K Bank, and Toss Bank also contributed to creating an environment where they can easily get loans.

The reckless purchase of apartments through Yeongkkeul is largely due to the significant rise in house prices over the past five years. According to KB Kookmin Bank's Liv Real Estate, the average apartment sale price in Seoul rose from the 600 million won range to the 1.2 billion won range during the current government's 4 years and 8 months in office. C, a 30-something office worker who bought an apartment in Gangbuk-gu, Seoul, through Yeongkkeul in the second half of last year, said, "My income stayed the same, but seeing house prices rise to an unaffordable level made me decide to buy a house," adding, "I saw it as practically the last chance to buy a house in Seoul."

◆Debt bomb 'warning signs of credit delinquents'= The problem is that reckless debt investment is raising warning signs about an increase in credit delinquents. According to Statistics Korea, the debt of household heads in their 30s increased by 11% last year to an average of 111.9 million won. Only the 30s age group showed double-digit growth. The average debt of household heads in their 20s also reached 35.5 million won. Considering funds borrowed for university tuition, housing, and living expenses, the actual amount is estimated to be higher. The Korea Institute of Finance analyzed that "those under 30 led the increase in household loans." Many young people have taken out loans from multiple sources. According to the Bank of Korea, as of the end of June last year, 32% of household loans by young people, about 150 trillion won, were multiple debts. Multiple debts refer to borrowing money from three or more financial institutions and are considered toxic debt.

The stock debt investment craze is evidenced by margin loans. The balance of margin loans, which was only about 9 trillion won at the end of 2020, surpassed 20 trillion won for the first time in January last year. It reached 22 trillion won in May and even surpassed 25 trillion won in August. As of last year, the number of margin loan users in their 20s and 30s at the top 10 domestic securities firms more than doubled.

Youth have lower assets and income compared to middle-aged groups, making them more vulnerable to market shocks. Stock returns are already dismal. According to the Korea Capital Market Institute, 75% of new stock investors and investors under 20 suffered losses using margin loans. Kim Min-ki, a research fellow at the Korea Capital Market Institute, said, "Young investors in their 20s and 30s who actively use margin trading showed lower returns."

The cryptocurrency market is also experiencing a sharp downturn. The market fears that the bottom has not yet been reached. Because there is no physical asset, it is even more vulnerable during interest rate hikes.

The real estate market is also on thin ice as prices fall. According to the Korea Real Estate Board, as of the second week of February (14th), Seoul apartment sale prices fell by 0.02% compared to the previous week. After turning negative for the first time in the fourth week of last month, the decline continued for four consecutive weeks. The negative price change rate is the first in about 1 year and 7 months since the end of May last year.

Experts point out that since young people have a wide spectrum of income and repayment ability, a detailed diagnosis of loan status among people in their 20s and 30s should be conducted proactively. Kim Deok-rye, head of the research office at the Korea Research Institute for Housing and Urban Affairs, said, "Many young people have taken on Yeongkkeul and debt investment, and since this could impact the economy, simply saying that measures are needed could cause unexpected side effects," adding, "The government's role is to identify how many young people will feel burdened by repayments during the interest rate hike period and to design measures that do not encourage moral hazard."