Concerns over Effectiveness
South Korea has failed to reduce household debt for six years. Accordingly, the new government is preparing for a two track strategy consisting of an increase in laborers' income and welfare in order to tackle the country's soaring household debt. It will come up with measures to increase workers’ income by reducing the number of irregular workers and creating jobs in the public sector, supported by various welfare policies. Considering the fact that similar measures in the past had a short-term effect and the new measures exclude interest rates and real estate issues, there are concerns over the effectiveness of the new measures.
A senior official from the government said on May 28, “The control on total household debt amount is just expendable and the main goals are to increase workers’ income and welfare. When the government successfully raises the income and number of jobs, the comprehensive household debt plans are possible.”
The current government believes that a comprehensive measure for income and job is needed to bring household debt down. President Moo Jae-in’s main policy pledges to lower household debt include comprehensive plans to reduce living expenses, lessen the interest burden from high interest rates and cancel small long overdue loans as well as the expansion of non-resource loans in which borrowers are no longer liable for a loan if he hands over his house, which is a collateral, to lenders when the house prices goes lower than the amount of his loan. The Moon administration has also started reconsidering recipients of the small long-term overdue loan repayment. Since the Minjoo Party of Korea asks to expand the number of the recipients, more than 400,000 people are highly likely to be chosen as the first recipients.
The problem is whether the household debt policy works as planned. Despite numbers of relevant countermeasures, the rate of increase in household debts grew from 6.5 percent in 2014 to 10.9 percent in 2015 and 11.6 percent last year. Kim Jin-pyo, chairman of the special advisory committee, said at a business briefing session held by the Financial Supervisory Commission (FSC), “The market casts doubts on the country’s management capability of household debts.”
Some believe that policies related to interest rates and real estate are direct means to loans. However, the rise in interest rates can adversely affect the economy which is just starting picking up and increase the burden of households due to growing interests. According to the Bank of Korea (BOK), the burden of annual interest on loans goes up by 2.3 trillion won (US$2.05 billion) when the interest rate increases by 0.25 percent point. Also, 1.27 million of households will be at risk. This is why the BOK cannot increase the interest rates now.
The government also has difficulties in deciding what policies should take for the real estate market. When it changes the deb to income ratio (DTI) and loan to value ratio (LTV), the real estate market will be hit hard. During the briefing session of the special advisory committee on the 25th, the FSC also said it should carefully decide on regulations for the LTV and DTI. Since the LTV and DTI were not included in the president’s pledges, many thought that the new government will maintain the current LTV and DTI. As regulations for LTV and DTI had relaxed in August 2014, the LTV for apartment worth more than 600 million won (US$536,097) in the capital area jumped from 50 percent to 70 percent. An official from the financial industry said, “In a bid to instantly reduce the growth of household debts, it is easier to use the control on the total amount, rise in interest rates and regulations for real estate. But, these policies cannot be used easily considering the burden of household budgets and the economy.”