Almost Doubled
The household credit balance in Korea has almost doubled, from 524.8714 trillion won (US$472.6257 billion) to 1.0889814 quadrillion won (US$980.44262 billion) between 2005 and 2014. In contrast, the monthly average household income edged up just 48.4 percent from 2.898 million won (US$2,609) to 4.302 million won (US$3,873) during the same period. The gap between the rates of increase is even wider when the real income reflecting inflation is taken into account.
The rapid increase in household debt is attributable to mortgage loans. In the third and fourth quarters of 2014, the amount increased by no less than 11.9 trillion won (US$10.7 billion) and 15.4 trillion won (US$13.9 billion) each to overwhelm the increment of 1.1 trillion won (US$990 million) and 2.3 trillion won (US$2.1 billion) for the same quarters of the previous year.
Still, the government is not worried about the current debt level. “Household and corporate debt are supposed to increase as the interest rate drops, and the total debt size should not be the only yardstick in approaching the matter,” said Deputy Prime Minister Choi Kyung-hwan, adding, “The risk will be reduced if the asset market supports the debt and the total amount of debt is managed to be limited.” The Financial Services Commission echoed by saying, “It is true that the rate of increase is rather high, and those vulnerable members are under more pressure now to redeem their debts, but pushing for debt reduction with the household income stagnant is likely to backfire, making it even more difficult to manage the level of the liabilities.” In other words, both of them are focusing on increasing household income as a way of reducing household liabilities.
Under the circumstances, the government is planning to restructure household debts throughout this year by converting short-term and variable interest rate mortgage loans into long-term and fixed rate loans. It is going to invest 20 trillion won (US$18 million) from March 24 to this end. Moody’s said in its recent report that this measure would have a positive effect on bank credit ratings by reducing their exposure to loans.