Korean households increased risks by increasing debt despite the financial crisis
While the global financial crisis is being alleviated, household debt has increased to 700 trillion won, threatening financial stability again. In addition, SME loans currently stand higher than 430 trillion won, pressuring financial circles. Perhaps the most serious aspect is that most of the household debt comes from mortgage loans, which may create even more problems in the future.
According to Bank of Korea, household credit (debt) was 700trillion won the end of June 2009, an increase of 15 trillion won since the end of March. This combines household debt of 662 trillion won made by finance companies and 36 trillion won from purchases on credit cards.
Dividing debt as of the end of June by the total household number estimated by the National Statistics Office (16,917,000) results in a 41.24 million won debt per household. When divided by the total population (48,747,000), it results in an individual debt of 14.31 million won. Household debt decreased by 4.6 trillion during the first quarter before once again increasing.
As debt increases more than income, a households’ ability to repay is seriously damaged. According to the Bank of Korea, Korea’s Nominal Gross National Disposable Income was 502 trillion won in the first half of year, an increase of only 0.2% from the first half of 2008.
Gross National Disposable Income refers to income of which the nation can actually spend by subtracting overseas remittance from Gross National Income (GNI), to which remittance made to the country is added. GNI is based on adding or subtracting national interest, dividend, earned income, etc. to and from GDP. A 0.2% increase in Gross National Disposable Income is the lowest in history.
The second lowest was during the first half of 1998 with 2.6%, which increased to 5% in 2006, 6.8% in 2007, and 8.5% in 2008.
On the other hand, household credit increased by 5.7% from the same period last year, also the highest on record. The ratio between household credit and Gross National Disposable Income in the first half of the year is, higher than 1.32 times, for the same period of last year, meaning the nation’s ability to pay debt keeps falling.
Household loans increased by 13.8 trillion won between June and March. As for increases by financial institutions, deposit banks had 8.2 trillion won, non-banks deposit institutes such as savings and Saemaeul finance firms had 2.9 trillion won, and others with 2.7 trillion won.
The biggest part of the debt is mortgage loans. Mortgage loans increased by 8.2 trillion won. It may create side effects, such as destabilization of the real estate market. Recent regulation by financial institutes with mortgage loans in Seoul and other metropolitan areas aims to prevent such side effects. Excessive mortgage loans produce a burden for households when interest rates increase and if asset deployment takes place, it will be a serious blow not only to households but also financial institutions.
When the economy is poor, households need to restructure by decreasing debt just like financial institutions and companies. However, Korean households increased risks by increasing debt despite the financial crisis. Banks and other financial institutions have contributed to this increase in household debt by competing among themselves for household loans.
That this may bring about another financial crisis needs to be noticed. Financial institutions must adjust household debts and manage it at an appropriate level so as not to cause household insolvency.