As of the second quarter of this year, household and corporate debt has surged to approximately 2.26 times the nation’s economic size as measured by the gross domestic product (GDP). The Bank of Korea (BOK) has issued a warning emphasizing that the further expansion of private credit could potentially have adverse effects on the entire economy, including consumption and investment, unless the government starts coming up with policies to manage household loans and real estate prices now.
According to the “Financial Stability Report in September” released by the BOK on Sept. 26, the credit leverage, which is the ratio of private credit to nominal GDP, in the second quarter of this year stood at 225.7 percent. The growth in private credit outpaced the growth of nominal GDP, rising from the first quarter’s 224.5 percent.
The BOK has analyzed that household debt in South Korea, which accounts for 101.7 percent of the nominal GDP in the second quarter, is at an excessive level compared to the income earned by the nation’s citizens. This figure significantly surpasses that of major advanced economies at 73.4 percent and emerging economies at 48.4 percent.
In particular, in the case of South Korea, housing prices have been rising at a faster pace than the country’s economic growth rate. As a result, the total housing market value in South Korea has outpaced nominal GDP growth for over two decades, recently reaching three times its size. At the same time, low interest rates and relaxed regulations have lowered the barriers for loans, resulting in a rapid surge in household credit.
Corporate debt has also surged, driven by efforts from financial institutions to expand corporate loans and the impact of COVID-19 financial support measures. In the second quarter, the ratio of corporate credit to nominal GDP reached 124 percent, a level higher than the ratios observed during the 1997 Asian financial crisis at 113.6 percent and the 2008 global financial crisis at 99.6 percent.
The BOK has estimated the scale of household loan demand, suggesting that household debt could increase by approximately 4 to 6 percent annually over the next three years without policy intervention. Assuming that the nominal GDP growth rate remains at around 4 percent annually, it has also been analyzed that the household debt-to-nominal-GDP ratio could rise again starting from next year.
The BOK has called for policy measures to prevent the expansion of financial imbalances. It emphasized the need for the effective regulation and control of the supply pace of policy mortgages and stressed the importance of establishing regulations on the debt service ratio (DSR) at the borrower level. Simultaneous efforts to improve the qualitative structure of household debt were also emphasized.