Our debt burden is growingConcerns over a financial crisis sparked by household debt have been heightening. The Samsung Economic Research Institute pointed out that household debt has reached a dangerous level, similar to the 2002 credit card crisis. At the end of last year, household debt had doubled to 671 trillion won ($722 billion) in just five years. That is the third-fastest rate in the world. This is attributed to a considerable increase in home mortgage loans, in which households paid more than 40 trillion won in interest payments alone last year. This translates into debt of around 55 million won per household (based on a family of four), and many households are worried that they cannot manage that level of interest payments. The problem will likely get more serious. The government, in a dilemma, does not have appropriate measures to fight this. It needs a belt-tightening policy, such as raising interest rates to absorb 500 trillion won in capital, but if this policy is taken, a substantial number of households will find it harder to bear the interest burden.
It is necessary to rein in runaway housing prices, but if the prices plummet too rapidly, then home mortgage loans would become fragile. In the process, households may become insolvent and financial companies would have more loans that aren’t paid. This may lead to a credit crunch. In the early 1990s, three northern countries, Sweden, Finland and Norway, were hit hard by such crises. In Korea, the credit card crisis at the end of 2002 produced many credit delinquencies and credit card companies and banks suffered a crisis as a result. Recently, abnormal signs are emerging from household loans by U.S. and English financial companies.
It is no use to blame the government for its failed real estate policies. But we also cannot overlook this issue, because individuals are the ones who take responsibility. We know all too well from our experience that an individual crisis can inflict huge damage on all households and companies together, not just the one that incurs the debt.
Now is the time for the government to forge effective measures against this crisis. It needs to take a cautious approach to prevent the bubble from bursting.
What is critical at the moment is to adjust the speed and timing of the belt-tightening policies and try not to hamper market stability. We also urge financial companies to refrain from chronic lending competition. For their part, individuals can also try to reduce their debt to a reasonable level that they can cope with, recognizing that the current level is abnormal.