Too little, too late

The first household debt measure since the Moon Jae-in government took office was rolled out on Tuesday. The essence of the measure is tightening the real estate funding for multiple home owners while stepping up support for the disadvantaged class.

First the government will be adopting a new debt-to-income (DTI) ratio that will incorporate the principle of existing mortgages held by borrowers. Starting in the second half of next year a much tougher debt service ratio (DSR) will also be implemented. The measures also include adjusting or writing off debts of people who are long overdue on small loans.

The direction of the measure is right but unfortunately it came too late.

The Park Geun-hye government instituted policies that lifted the real estate market by encouraging people to borrow to purchase homes. It lowered the DTI and loan-to-value regulations, tools that exist to make sure borrowers can pay back loans.

As a result, an abnormal situation was created in which the economy struggled but household debt grew by double-digits every year.

Although the pace has slowed, in the first half of the year, household debt expanded 10.2 percent compared to the same period last year. Household debt including credit card purchases exceeded 1,400 trillion won ($1.24 trillion), which is equivalent to 95.6 percent of the nation’s GDP.

While an appropriate amount of debt stimulates the economy, excessive amounts actually hold it back.

The Bank of Korea and the Korea Development Institute have been warning about the huge household debt. Yet the previous government did little to discourage borrowing.

In June, President Moon ordered some kind of plan by August. But the head of the Financial Services Commission only took office in mid-July and the Blue House feared tightening measures would make the public sour during the Chuseok holidays. Which makes you wonder if this government is aware of the seriousness of the household debt problem — or if they have the will to solve it.

Korea’s household debt has already exceeded the OECD member nations’ average of 70 percent of GDP. Some argue there’s no need to worry as most of the debt is held by the middle and upper class. But interest rates are rising. We may be in a bubble that will burst. This should be the last time household debt measures are designed after the situation became truly alarming.

JoongAng Ilbo, Oct. 25, Page 34