[Financial Report] Household Debt Ratio Rises After 4 Quarters... "Expected to Increase Up to 6% Annually"

Household Debt-to-GDP Ratio at 101.7%
Possibility of Rising to 103% Next Year
Bank of Korea "Without Policy Response, Household Debt Will Increase 4-6% Annually"

Amid growing concerns over high interest rates due to prolonged monetary tightening in the United States, South Korea's household debt-to-GDP ratio turned upward in the second quarter of this year for the first time in four quarters. With recent signs of a rebound in housing prices and an expansion in household loans, there are concerns that if the household debt-to-GDP ratio continues to rise, it could further fuel financial instability.

On the 26th, the Bank of Korea announced that it had finalized the "September Financial Stability Report" containing these details at the regular meeting of the Monetary Policy Committee. According to the report, the household debt-to-GDP ratio in the second quarter of this year was 101.7%, up 0.2 percentage points from 101.5% in the first quarter. South Korea's household loan ratio relative to GDP currently ranks fourth globally, significantly exceeding the averages of advanced countries (73.4%) and emerging countries (48.4%).

In particular, as the perception that housing prices have bottomed out spreads and housing prices show signs of recovery, the pace of household loan growth is accelerating. Housing prices, measured by actual transaction prices of apartments in the Seoul area, fell about 25% from the peak in the second half of 2021 but have rebounded significantly this year. Based on the Seoul apartment actual transaction price index, after peaking in October 2021, prices fell 24.8% until the end of last year, then rose 11.2% from January to July this year. Not only the metropolitan area (7.6%) but also most other regions except Jeonbuk (1.2%) have shown rebounds.

◆Rapid Increase in Household Loans Centered on Mortgage Loans= Household loans, which had decreased from September last year to March this year, have sharply increased since April, mainly driven by mortgage loans. Household loans across all financial sectors have expanded as follows: April (+200 billion KRW), May (+2.8 trillion KRW), June (+3.5 trillion KRW), July (+5.3 trillion KRW), and August (+6.2 trillion KRW).

The Bank of Korea analyzed that depending on scenarios such as next year's housing prices and interest rate levels, the household loan-to-GDP ratio could rise to as high as 103%. The Bank stated, "If there is no policy response, household debt could increase by about 4-6% annually over the next three years. Assuming nominal GDP growth is around 4% per year, the household debt-to-GDP ratio could start rising again from next year."

The problem is that if the rapid increase in household loans leads to a widening of financial imbalances, it could not only undermine financial stability but also negatively impact economic growth in the medium to long term. Especially, the delinquency rate, which had been low due to rapid loan growth, has been rising since the second half of last year due to increased loan interest rates and delayed economic recovery, with new delinquencies increasing. The proportion of loans to vulnerable borrowers, who show high delinquency rates in household and self-employed loans, is estimated at about 7.1% in the second quarter of this year, up 0.1 percentage points from the previous quarter.

The Bank of Korea advised that to stabilize the household debt-to-GDP ratio downward in the future, policy efforts should focus on appropriately managing the pace of loan growth for the time being. The Bank emphasized, "Following the adjustment of the supply speed of policy mortgages such as the Special Bogeumjari Loan, it is necessary to closely monitor recently surged areas such as long-term mortgage loans and loans from internet-only banks. In the medium to long term, it is important to establish borrower-level total debt service ratio (DSR) regulations, strengthen macroprudential policy operations including the imposition of countercyclical capital buffers (CCyB), and manage the overall policy stance." It added, "To stabilize the housing market, efforts should be made to manage housing supply and improve the qualitative structure of household debt through measures such as expanding the proportion of installment repayment loans."

◆Financial Vulnerability Index and Financial Distress Index Rise Again= Meanwhile, the Financial Vulnerability Index (FVI), which reflects medium- to long-term vulnerabilities within the financial system, turned upward again in the second half of this year, reflecting latent vulnerabilities. The FVI for the second quarter was 43.6, up from 43.3 in the first quarter, significantly exceeding the long-term average (39.1) from the first quarter of 2007 to the second quarter of 2023. This index peaked at 59.3 in the second quarter of 2021 and then showed a downward stabilization trend but showed an upward trend again in the second quarter of this year. The index is likely to rise further as household loans have recently started increasing again.

The Financial Stress Index (FSI), which shows short-term volatility in financial market prices such as stocks, bonds, exchange rates, and credit default swap (CDS) premiums, also rose. After falling to the "caution" stage following a near-crisis level of 21.0 in February, the index showed a slight increase to 16.5 last month. Lee Jong-ryul, Deputy Governor of the Bank of Korea, said, "The increase in household debt, the expansion of default risk in real estate exposure mainly in non-bank financial institutions, and the increased debt repayment burden of households and companies are vulnerabilities and risk factors within our financial system. It is necessary to be cautious to prevent latent risks within the financial system from materializing in the event of domestic and external shocks such as economic downturns and asset market deterioration."