[The Shadow of High Interest Rates] ① "If You Have to Pay Interest, You Can't Spend Money... Consumption Slowdown More Frightening Than Delinquency"

Consumer Growth Stalled Since July Last Year
Wallets Closed as Interest Rates Rise
Borrowing and Increased DSR Slow Consumption Growth Rate

"Our family of four went out to eat Seolleongtang, and one bowl cost over 10,000 won. So when I saw discounted ready-to-eat Seolleongtang at the mart, I bought a set of four for 16,000 won and ate that instead."

Jang Jiyong (44), an office worker living in Seongdong-gu, Seoul, decided to tighten his belt even more. He took out a 500 million won loan when he moved last spring. The interest rate at that time was 4.05%. Since then, he has been paying 2.1 million won monthly for principal and interest. Borrowing with a variable interest rate was a mistake. The interest rate went up and down like a roller coaster. "Last winter, when the monthly repayment rose to 2.8 million won, it was dizzying. This spring, the rate dropped again, reducing the payment by about 100,000 won. But that barely made a difference. Anyway, the rate has gone up again, and since last month, the principal and interest have returned to 2.8 million won. To avoid running a deficit, I have to spend even one won less."

Consumption Slowdown → Direct Hit to Domestic Demand

People’s wallets have been tightly closed. Starting from last summer through this year, the growth in consumption has stalled. This is a completely different picture from the rapid recovery in household consumption from the first quarter of 2021 (206.8 trillion won), when daily life was returning to normal after COVID-19, through the third quarter of last year (224.8857 trillion won). According to the Bank of Korea, household consumption has stagnated from the fourth quarter of last year (223.7056 trillion won) through the third quarter of this year (224.9707 trillion won).

What is the cause? Researcher Jung Hwayoung from the Korea Capital Market Institute pointed to interest rates as the primary factor. According to the Bank of Korea, mortgage loan interest rates (hereafter, mortgage loans) have hovered between 4% and 5% since exceeding 4% in May last year.

Researcher Jung said, "The biggest problem with household debt in our country is not the crisis caused by vulnerable borrowers, but the high proportion of mortgage loans, which causes consumption growth rates to be very low when interest rates rise." He warned, "If consumption remains sluggish even after COVID-19 ends, it could lead to a slowdown in the domestic economy."

On the 19th, Researcher Jung released a report titled 'Current Status and Risk Factors of Domestic Household Debt,' which shows how much less the so-called 'Youngkkeunjok' (those who borrow to the limit, even to the point of their soul) who took out new loans or whose interest burdens increased during the interest rate hike period consume. The analysis was conducted on households under 64 years old using data from the Household Financial Welfare Survey conducted by the government from 2017 to 2022.

High Debt Households Spend Less Even When Income Rises

First, let’s look at cases where household debt increased, such as new Youngkkeunjok. Suppose there are two households, A and B, with all conditions the same. Assume household A’s consumption growth rate increased by 1 percentage point. However, household B’s debt increased as much as its income when buying a house. In this case, household B’s consumption growth rate only increased by 0.3 percentage points. This means households with increased debt consume less than those without.

The same applies to existing Youngkkeunjok whose total debt service ratio (DSR) increased due to rising interest rates. Suppose household B has a DSR 10 percentage points higher than household A, with all other conditions the same. When household A’s consumption growth rate increases by 1 percentage point, household B’s consumption growth rate only rises by 0.78 percentage points. This means household B spent less money due to the increased repayment burden.

Households with high debt spend less even when income rises. Suppose household A, whose debt-to-asset ratio is in the lower 80%, and household B, in the upper 20%, both experience a 10% increase in income. In this case, household A’s consumption growth rate increases by 1.47 percentage points, but household B’s consumption growth rate only rises by 1.15 percentage points. This shows that households with high debt are reluctant to consume even when earning more.

'Households with Excessive Interest Payments' Greatly Increased

Although the recent consumer price inflation rate remains in the 3% range, the perceived inflation rate is much higher, increasing the burden on ordinary citizens. On the 30th, during lunchtime, citizens visiting a bakery in Seoul are eating bread. Photo by Jang Jin-hyung aymsdream@

Then, how much has the interest burden as a share of income increased? For households with debt, interest payments (excluding principal) as a percentage of income reached 5.7% in the second quarter of this year. The average monthly household income was 5,824,000 won, of which 329,000 won went to interest. This is a clear difference compared to 3.8% (222,000 won out of 5,759,000 won) in the first quarter of last year, just before interest rates began to rise significantly.

Researcher Jung said, "As of April this year, 19.6% of all households paying interest spent 10% of their income on interest payments. In April last year, it was only 11.6%. The number of households excessively spending on interest has increased significantly in one year, reducing their capacity to consume."

What impact does the consumption slowdown caused by household debt have on us? Researcher Jung explained, "Consumption sluggishness leads to a slowdown in the domestic economy. Especially for self-employed individuals, the domestic economy greatly affects their income. Therefore, the income of self-employed people decreases." He added, "The deepening consumption slump is also an additional factor lowering the potential growth rate."