The Current Status of Korean Household debt and the Government’s Plan

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                                                                                                                            (Photo = Yonhap News)

People are well aware of the nightmarish crisis that had swept the world economy a few years ago. The global financial crisis 2007-2008 led to bankruptcy of giant financial firms and also devastated the economy of many countries. What is notable about the global financial crisis is that the primary cause of the catastrophic event was the unsound mortgage loans taken out by households. As witnessed in the global financial crisis, household debt can end up causing detrimental effects on the economy.

There have been constant worries about the rapid increase of Korean household debts. According to reports by a multiple number of press or research centers, the amount of household debt is snowballing dangerously and Korea’s overall amount of household debt is relatively large compared to the size of Korean economy.

However, the claim of some people, that the status of household debt is pessimistic, has yet to be proven right. It is true that the amount of household loans had increased sharply in the past but the pace has been slowing down since 2009. The relative size of household debt to the size of Korean economy is certainly large but considering various indicators for soundness of debts, the status of household debt is stable.

Countries (2009) Korea US UK Japan OECD Avg.
Household Debt / GDP (%) 80 97 103 69 69
Household Debt / Disposable Income (%) 143 126 168 112 (08’) 123

                                                                                                          (Chart = FSC document, 21st Tele-conference for Global Investors)

The default rates of household loan and house mortgage loan are 0.68% and 0.58% respectively (Sept. 10). The rates are significantly low noting that the default rate for mortgage loan in US is 9.9%. Korea’s loan-to-value ratio (LTV) is also low compared to other major countries. The LTV of Korea is 47.1% while that of US and UK is 74.9% (July 9) and 85.2% (Dec. 7) respectively. Another notable factor is the ratio of high income earners in the loan market. The ratio of high income households to household borrowers is high. Four to five classes in the upper part of 10-division-income-level chart make up a total of 64 percent of Korean household debt.

Despite the fact that the current status of household debt is not so worrisome, the Korean government is keeping a close eye on it. The government is aware that unstable household debt might work as a potential risk factor, and will put efforts in successfully managing the household debt level. To attain the goal, the government launched a task force that consists of private experts and government officials. The task force will regularly hold meetings. The main agendas are as follows: ①Management of size and increase rate of household debt, ②Plans to strengthen debt redemption capability of households, ③Measures to reinforce the soundness of household loans, ④ Plans of financial aids for financially vulnerable class.

The government, especially the FSC, has selected the stable management of household debt as this year’s main task and is planning a set of measures aimed at controlling household debt.

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