Last Year DSR 13.6%... Largest Increase Since COVID-19
Due to the impact of interest rate hikes continuing since August 2021, last year South Korea's household debt burden level and growth rate were the second highest among major countries worldwide. Although the Bank of Korea has kept the base interest rate unchanged four times in a row this year, household debt has turned to an increasing trend again, raising concerns that the household debt burden will grow further.
According to the Bank for International Settlements (BIS) on the 17th, South Korea's total debt service ratio (DSR) for the household sector last year was 13.6%, ranking second highest among 17 major countries surveyed worldwide, following Australia (14.7%). BIS publishes quarterly DSRs for 17 countries calculated using national accounts.
The DSR is an indicator showing the burden of principal and interest repayment relative to income; a higher DSR means a greater debt repayment burden compared to income.
Following Australia and South Korea, Canada (13.3%), the Netherlands (13.1%), Norway (12.8%), Denmark (12.6%), and Sweden (12.2%) all had DSRs exceeding 10% as of last year. The United Kingdom (8.5%), the United States (7.6%), Japan (7.5%), Finland (7.5%), Belgium (7.3%), France (6.5%), Portugal (6.2%), Germany (6.0%), Spain (5.8%), and Italy (4.3%) followed.
South Korea's household debt growth rate was also the second fastest among major countries.
South Korea's DSR last year rose by 0.8 percentage points compared to 2021 (12.8%), ranking second after Australia, which increased by 1.2 percentage points from 13.5% to 14.7%. Canada increased by 0.7 percentage points (12.6→13.3%), the United States by 0.4 percentage points (7.2→7.6%), Finland by 0.3 percentage points (7.2→7.5%), Japan by 0.1 percentage points (7.4→7.5%), Sweden by 0.1 percentage points (12.1→12.2%), and Portugal by 0.1 percentage points (6.1→6.2%), all showing increased DSRs over one year, indicating a growing principal and interest repayment burden.
On the other hand, among the 17 countries surveyed, nine countries saw their DSRs decline last year. In 2021, Norway (14.5%), Denmark (14.2%), the Netherlands (13.8%), and Australia (13.5%) had higher DSRs than South Korea (12.8%), but last year South Korea's DSR surpassed all except Australia.
Expanding the DSR trend analysis to the period after the COVID-19 pandemic, South Korea's DSR increase (compared to the end of 2019) was 1.4 percentage points, the largest among the countries surveyed. The BIS DSR includes households without financial debt in the income denominator and applies a uniform loan maturity (from 2018) when calculating principal and interest repayments, which likely underestimates the actual burden. However, it is considered useful for international comparisons of the speed of increase in household principal and interest repayment burdens.
Household Principal and Interest Repayment Burden Increases... Deposit Banks' Household Loan Balances Reach 'All-Time High'
According to the Bank of Korea, the average DSR of households holding financial debt based on the 2021 Household Financial Welfare Survey (covering income and expenditure) was calculated at 29.4%. Based on the household debt database (DB), the average DSR for household loan borrowers was 40.6% in the fourth quarter of last year, much higher than the BIS standard.
South Korea's DSR level and growth rate, second highest globally except for Australia, are due to the significant increase in household principal and interest repayment burdens caused by interest rate hikes.
When interest rates rise, the overall household debt growth trend inevitably slows down slightly. In fact, the size of household loans from deposit-taking institutions decreased by 1.1%, from KRW 1,261.4859 trillion in 2021 to KRW 1,248.001 trillion last year, marking the first decline since related statistics began in 2003.
However, the interest rate on household loans from deposit banks (based on outstanding balances) rose from 3.01% per annum in 2021 to 4.66% last year, significantly increasing the interest burden on indebted households. In particular, as household loans have recently turned to an increasing trend again, concerns are growing that the DSR increase will continue for the time being.
The outstanding balance of household loans from deposit banks reached an all-time high of KRW 1,062.3 trillion as of the end of June. Bank household loans decreased until March this year but have increased for three consecutive months since April, with the increase in June being the largest in one year and nine months since September 2021.
Household loans increased mainly in mortgage loans. In June, bank mortgage loans increased by KRW 7 trillion due to expanded demand for housing purchase funds, increased move-in volume, and a shift to increased jeonse (long-term deposit lease) loan demand.
The recent increase in household loans is also becoming a burden for the Bank of Korea, which decides monetary policy. On the 14th, Lee Chang-yong, Governor of the Bank of Korea, said in a lecture at the Korea Chamber of Commerce and Industry Jeju Forum held at the Haevichi Hotel & Resort in Jeju, "When the (base) interest rate was set at 3.5% per annum, household debt increased over three months," adding, "The increase in household debt is a significant long-term burden."
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