BOK: Household Debts Causing Serious Concerns
The Bank of Korea submitted a monetary and credit policy report to the National Assembly on June 10. In this report, the central bank re-expressed its concerns over household debts, saying that tapering is imminent, and the debts will have a serious impact on economic growth.
According to the central bank, the household debt-to-nominal GDP ratio reached 103.8 percent at the end of last year after reaching 91.8 percent in December 2018 and 101.1 percent in the third quarter of 2020. As of December 2020, the percentage of South Korea was the sixth-highest in the OECD.
The pace of household debt increase is even more worrisome. Last year, South Korea’s household debt-to-nominal GDP ratio increased 4.6 percent year on year in the first quarter, 5.2 percent in the second, 7 percent in the third, and then 7.9 percent in the fourth with only one country outpacing it in the OECD.
This was led by the prices of houses. Specifically, the prices rose 1.1 percent, 2.4 percent, 4.5 percent and 7.2 percent from a year ago in the same periods and jumped 10.3 percent year on year in the first quarter of this year. As a result, the price-to-income ratio (PIR) in the capital and nearby areas reached as high as 10.4 in the first quarter of this year. For reference, the PIR was 8.6 in the first quarter of 2007, when a global financial crisis was in the making.
“According to the IMF, private consumption tends to increase 0.23 percentage point in a year when the ratio of household debts increases 1 percentage point and the consumption tends to decrease two years later,” the central bank explained, adding, “With South Korean households’ debt increase exceeding their increase in income, their consumption is slowing down.”
The bank also expressed concerns over lopsided household debts. “These days, financial imbalances are continuing to increase and the debts are lopsided to the real estate sector, which may result in more economic volatility and a decline in growth potentials,” it said.