Bank of Korea Raises Concerns Over Rising Household Debt Ratio
Excessive Household Debt Hinders Social Development
There are projections that South Korea's household debt-to-GDP ratio, which is already among the highest in the world, will increase further due to rising household loans driven by soaring housing prices. Concerns are growing that excessively high household debt could hinder overall social development.
According to the Bank of Korea's Monetary and Credit Policy Report on the 14th, South Korea's household debt-to-GDP ratio in the first quarter was recorded at 92.1%. This is the fourth highest level among the 31 OECD member countries.
Although the household debt-to-GDP ratio has gradually declined since peaking at 99.3% in the third quarter of 2021, it remains at a world-class high level and poses risks that could impede economic growth, according to the Bank of Korea. The Bank considers an appropriate household debt ratio to be around 80%.
Excessively high household debt can suppress consumption, hinder economic growth, increase risks in the real economy, and deepen economic inequality among economic agents, thereby significantly obstructing national development.
The report noted that the household debt ratio could rise again as household loans continue to increase due to recent housing price rises in the Seoul metropolitan area. According to the Bank of Korea's calculations, if household loans in the financial sector increase by 6 trillion won per month, the household loan-to-GDP ratio will rise to 92.2% in the second quarter, 92.3% in the third quarter, and 92.6% in the fourth quarter.
Given that household loans in the domestic financial sector increased by as much as 9.8 trillion won last month, the possibility of a rise in the household loan ratio in the third quarter is very high.
The report analyzed that recent housing price increases were influenced by a combination of factors, including concerns over supply-demand imbalances due to a shortage of new apartments in Seoul and avoidance of non-apartment housing, a decline in loan interest rates due to expectations of rate cuts, deregulation, and expansion of policy financing.
In South Korea's case, the economic stimulus effect from rising housing prices is limited, while financial and economic volatility could intensify during future housing price adjustments, and the high household debt ratio may act as a structural factor restricting consumption.
Although housing price increases theoretically stimulate the economy through increased construction investment and wealth effects, South Korea has a low correlation between housing prices and building investment, and the wealth effect is limited due to the high household debt ratio, the report added.
A Bank of Korea official emphasized, "Since the housing market and household debt are influenced by various factors such as housing supply, macroprudential regulations, and interest rates, it is necessary to respond with an appropriate policy mix to prevent the recent expansion from becoming prolonged."
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