Korea’s household debt problem is going from bad to worse after a brief period of relief. What’s ironical this time is that the government’s measures to revitalize the sagging property market are aggravating the problem

2013-08-06 17:03

Household debt blues

The nation’s household debt problem is going from bad to worse after a brief period of relief. What’s ironical this time is that the government’s measures to revitalize the sagging property market are aggravating the problem. Household debt contracted slightly to 961.6 trillion won at the end of March this year, but the figure began to rise again in April, raising the possibility that household lending may top 1,000 trillion won by the end of the year. What’s disturbing is that household debt rebounded in the second quarter because more people rushed to borrow money to buy houses before the government’s temporary tax break for home purchases expired. This must be a dilemma to the government, given that household debt could swell at a faster pace if the government takes fresh measures to boost housing transactions.No wonder the household debt overhang is one of the biggest risk factors facing the Korean economy. The fact is that consumers who bought houses on credit are reluctant to spend, which would in turn deepen the economic slowdown, and cause some of them to join the “house poor’’ who are unable to pay off their debts even after disposing of their houses. In this process, banks and other financial institutions become insolvent because of their debt exposure.
More worrisome recently is the rising proportion of household loans extended by non-bank financial institutions as low-income and elderly borrowers look to savings banks and insurance companies that are less tricky about screening loan applications. Moreover, there has been a steady rise in demand for loans because many parents are taking on large amounts of debt to finance their children’s university education and laid-off workers are starting their own businesses with borrowed money.
Against this backdrop, interest rates are apparently on an upward curve, affected by the U.S. Federal Reserve’s move to exit from years of quantitative easing. This will be the most egregious nightmare for low-income households struggling with heavy debt obligations.
The government still appears to believe that our household debt has not come closer to the point where it may be unsustainable, citing the fact that high-income earners account for 70 percent of household debt borrowers. But there must be preemptive actions before it’s too late, given the severity of the problem.
It’s needless to say that brisk job creation will be the fundamental solution, but this will take a lot of time. Even before that, the government needs to map out elaborate soft-landing measures, including the establishment of a state-run bad bank to take over non-performing assets, if necessary.