Despite the 'Record High Household Debt'... Reasons for 'Stable' Analysis [BOK Focus]

As the Economy Expands, Debt Grows Alongside
Managing Household Debt Growth to Lag Behind Nominal GDP Growth
End of 2022: 97.3% → End of 2023: 93.6% → End of Q3 2024: 90.8%
Downward Stabilization for Three Consecutive Years... Targeting 'Around 80%'
Mortgage Loans Stir Again, but Housing Transactions Slow
Mortgage Loans Lag Housing Sales by 2-3 Months
"No Sharp Increase Expected in Q1"

'1927 trillion won.' Household credit (debt) increased again in the fourth quarter of last year, breaking the record for the largest balance ever. The 1927 trillion won is the largest scale since related statistics began to be compiled in the fourth quarter of 2002. Household credit, which surpassed 1900 trillion won in the third quarter of last year due to a significant increase in mortgage loans, is now approaching 1930 trillion won as of the end of last year.

However, the Bank of Korea analyzed that such household debt is at a 'manageable and stable level.' This is because attention is focused on the pace of household debt growth within the expanding economic scale rather than the size of the debt itself.

Focus on Household Debt Growth Rate Compared to Nominal GDP Growth Rate

On the 18th, Kim Minsu, head of the Financial Statistics Team at the Economic Statistics Division 1 of the Bank of Korea, said at the '2024 Fourth Quarter Household Credit (Provisional) Briefing,' "The annual household credit last year aligns with the gradual downward stabilization target of the household debt ratio set by the government and the Bank of Korea."

Reducing household debt is necessary. If interest burdens increase, domestic demand may shrink, hindering economic growth and financial stability. However, since the debt size increases along with the growing economic scale, attempting to drastically reduce the absolute debt size could also negatively impact the real economy. Therefore, the government and the Bank of Korea aim to gradually reduce the 'debt ratio' by slowing the pace of household debt growth to be slower than the growth rate of the Korean economy.

The household debt growth rate compared to the nominal Gross Domestic Product (GDP) growth rate surged from 89.6% at the end of 2019 to 97.1% at the end of 2020, when COVID-19 fully began. At the end of 2021, still under the influence of COVID-19, the ratio increased to 98.7%. Since then, it has decreased for three consecutive years: 97.3% at the end of 2022, 93.6% at the end of 2023, and 90.8% as of the third quarter of last year.

Kim said, "Annual household credit in 2024 increased by 2.2% compared to the end of the previous year, and since nominal GDP has grown by more than 6% year-on-year from the first to the third quarter of 2024, the household debt ratio is expected to stabilize downward for the third consecutive year." However, the early 90% range is still high, ranking 5th among 44 countries for which data is provided by the Bank for International Settlements (BIS). The government aims to reduce this ratio to around 80%, minimizing adverse effects on the real economy.

Mortgage Loans Increase but... "No Sharp Rise in Q1"

Household credit refers to comprehensive household debt, including loans taken from banks, insurance companies, and lending institutions, plus pre-payment card usage (sales credit). Among these, mortgage loans within household loans are the main driver of household credit size.

The 18.5 trillion won increase in household credit in the third quarter of last year, after just one quarter, was largely due to the 19.4 trillion won surge in mortgage loans during the same period. For the same reason, the increase in household credit in the fourth quarter of last year decreased to 13 trillion won, as the increase in mortgage loans fell to 11.7 trillion won compared to the third quarter.

When buying a house, people borrow money from banks and others using the house as collateral. Since the final payment is made 2-3 months after the contract, mortgage loans lag behind housing sales by a similar period. Housing sales have been gradually declining since peaking in July last year. According to the Ministry of Land, Infrastructure and Transport, nationwide apartment transactions increased from 106,000 units in the first quarter of last year to 131,000 units in the second quarter and 142,000 units in the third quarter, but decreased to 114,000 units in the fourth quarter. Apartment transactions in the Seoul metropolitan area, including Seoul, also rose from 42,000 units in the first quarter to 61,000 units in the second quarter and 74,000 units in the third quarter, but fell to 46,000 units in the fourth quarter.

Although the increase in mortgage loans has continued until last month this year, concerns about the scale are relatively low. According to the Financial Services Commission and the Financial Supervisory Service, mortgage loans in the financial sector increased by 3.3 trillion won in one month last month. This month, until the 14th, the increase in mortgage loans at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) was about 1.1162 trillion won. The Bank of Korea expects the household debt growth trend to slow down for the time being, as real estate transactions have been sluggish since July last year and financial authorities continue their loan regulation policies.

Kim said, "The government's macroprudential policies, such as the implementation of the stress Debt Service Ratio (DSR) in September last year, and banks managing their loan portfolios at the end of the year, have led to a decrease in real estate transactions." He added, "This year, too, household debt stabilization centered on mortgage loans is expected to continue in the short term due to the ongoing decline in housing sales." He also noted, "Considering the overall year, as financial authorities continue their household debt management policies, including the implementation of the third phase of stress DSR, the trend of household debt stabilization is expected to continue for the time being."