[Urgent Check] Household Debt Pressuring the Real Economy

Household Credit Balance Hits Record High of 1869 Trillion in Q2
Panic Buying by 2030 Generation Also Takes a Direct Hit
"Hard to Recover if Households Are Severely Impacted"

[Asia Economy Reporter Seo So-jung] The surging household debt is a hidden obstacle for the South Korean economy. Since the COVID-19 pandemic, the credit (debt) levels of households and businesses have increased excessively compared to the real economy indicators such as Gross Domestic Product (GDP). Atif Mian, Professor of Economics at Princeton University and author of "House of Debt," warned strongly, "Historically, severe recessions have been preceded by a rapid accumulation of household debt and a sharp decline in asset values," adding, "The surge in household debt leads to a decrease in consumer spending and results in a prolonged recession."

According to the Bank of Korea on the 4th, the outstanding household credit balance in the second quarter of this year reached 1,869.4 trillion won, marking the highest level since statistics began in 2003. As household debt accumulates, volatility in the financial and real economy increases due to domestic and external shocks, raising concerns about the stability of the financial system. If financial imbalances deepen, it can lead to constraints on household consumption and a contraction in corporate investment, thereby impacting the real economy.

Professor Il-sang Lee, Specially Appointed Professor at Seoul National University’s Department of Economics, pointed out, "During the 1997 Asian Financial Crisis, corporate debt was high but household debt was low, and during the 2008 Financial Crisis, government debt was low, allowing South Korea to secure a high national credit rating and enter into currency swap agreements with the United States. However, the difference now is that debt in all sectors?government, corporate, and household?is rapidly increasing, making it difficult to respond effectively during an economic crisis." He emphasized that especially with the Federal Reserve’s aggressive tightening, domestic interest rates are rising sharply, increasing debt repayment burdens. This could trigger a wave of defaults centered on vulnerable sectors such as low-income and small-scale self-employed individuals, financially vulnerable household borrowers (low-income, low-credit among multiple debtors), over-indebted borrowers, and marginal companies.

Warning signs are already being detected. The number of self-employed multiple debtors who have borrowed from three or more financial institutions surged by 45% within six months this year, with their average loan amount reaching nearly 500 million won. As of the end of June this year, the number of multiple debtors among the self-employed was 414,964, up 44.7% from 286,839 at the end of last year, and their loan amount increased by 20.3% from 162 trillion won to 195 trillion won. If the repayment ability of multiple debtors deteriorates rapidly, it could lead to an economic and financial crisis. The Bank of Korea warned, "It is estimated that when the benchmark interest rate rises by 1 percentage point, the delinquency rate of vulnerable self-employed borrowers increases by 1.8 percentage points," adding, "There is a possibility that the risk of default will increase, especially among low-income self-employed individuals whose debt repayment burden is expected to rise significantly with interest rate hikes."

Apartment listings with price tags are posted in the real estate-dense commercial area of Songpa-gu, Seoul, where the decline in real estate prices and the transaction freeze phenomenon continue. Photo by Jinhyung Kang aymsdream@

The 2030 generation who engaged in ‘panic buying’ and ‘Young-kkul (borrowing to the max)’ amid the real estate price surge are also expected to be hit hard. According to the Bank of Korea, in the second quarter of this year, the proportion of household debt held by those aged 30 and under accounted for 27.3% of total household debt. This proportion remained high after reaching a record high of 27.5% in the first quarter, the highest since related statistics began in 2012.

Director Bu-hyung Lee of Hyundai Research Institute pointed out, "While debt can increase as the economy grows, in the U.S., household debt was adjusted during crises such as the dot-com bubble, 9/11 terrorist attacks, and the global financial crisis," adding, "In South Korea, household debt has been accumulating in one direction without adjustment, which is the biggest risk as debt is like a time bomb for the economy." He emphasized, "If households are hit by factors such as falling real estate prices due to interest rate hikes, recovery will be difficult and take a long time," and warned, "As seen in Japan’s case, prolonged stagnation is possible, so thorough preparation is needed to prevent the expansion of credit risk due to interest rate hikes from leading to economic contraction and crisis."