Companies need to investThe base interest rate fell to the lowest level ever, but interest costs for households have hit their highest levels so far. Families of two or more had average interest payments of 803,772 won ($705) last year, a 3.1 percent increase over 2008.
This is because real estate mortgage loans continuously increased despite the generally bad economy, and financial companies are resistant to loan interest reductions.
Household debt reached 734 trillion won last year and interest on real estate mortgage loans kept pace.
Recently, the culture of households saving money while companies borrowed for investments has been breaking down.
Last year, companies instead stashed away 215 trillion won in banks. They made profits thanks to low interest rates and favorable exchange rates, but they chose to hoard funds rather than making facility investments in uncertain economic times.
It is also unhealthy that 85 percent of the deposits were made in savings accounts that must be held for a year or more. This simply goes to show the lengths to which companies are going to avoid making investments.
Needless to say, it is difficult to agree with the doom-and-gloom scenario that household debt will soon become a ticking time bomb. Since most of household debt is held by the upper-income classes, there is no need to become too concerned about the burden of repayment. Real estate mortgage loans also have safety nets called loan to value ratios and debt to income ratios.
However, this does not mean that things can stay as they are. If household debt continues to increase at a much higher rate than income, there could be serious side effects. A strong strategy needs to be established to handle the household debt problem before the situation grows worse.
Increasing the interest rate is one way to put the brakes on rising household debts. However, it could be a dangerous choice that indiscriminately shocks the entire economy. The best solution would be one that provides for a soft landing. It is important to manage the real estate market in order to stop an increase of mortgage loans. A soft landing is only possible when income increases faster than household debt.
In order to increase household income, companies need to make investments and create more jobs. This is also why the solution to the household debt problem can only be found in encouraging companies to willingly make investments.
This is how to break the improper culture of “corporate money increases along with household debt.”