Index warns that credit bubble could be forming

Should household debt continue to grow as quickly as it did last year, it may reach a critical point at the end of the year, warned the Samsung Economic Research Institute yesterday.
Household debt is nearing the level observed in 2002, when the Korean credit card bubble burst, the private think tank wrote in a report, citing bigger mortgage loans but no notable income gains.
The institute has developed an index it says gauges the danger level of household credit in each quarter, and that index stood at 2.29 in the fourth quarter last year, 0.23 points more than the 2.06 seen in the second quarter of 2002, right before the credit card bubble started collapsing.
The measurement compares household financial debt against household financial assets, disposable income and others.
“If household debt snowballs for two consecutive quarters at the speed of last year, the index will surge to 2.84, a figure seen in the third and fourth quarters in 2002,” said Kwon Soon-woo, research fellow of the institute.
“Of course the current economic and financial circumstances differ from those before the bubble period, but an alarm bell is certainly ringing about a possible crisis brought about by credit delinquency stemming from household debt.”
Household debt totaled 671 trillion won last year, indicating an increase of 2.1 times over the past six years.
Though household debt increased by an annual average of 8.6 percent from 2004 to 2006, disposable income rose just 5.3 percent per year on average during that same time period.
Kwon recommended the government focus on preventing household insolvency rather than on cooling the real estate market, saying higher interest rates on household loans will only worsen the financial situation of households.

By Seo Ji-eun Staff Writer [spring@joongang.co.kr]