Growth of household debt outpaces assets

While fear has emerged over the possibility of a financial crisis due to rapidly growing household debt, government data showed yesterday that the volume of debt held by Korean households rose at a much faster pace in the past year than the value of their assets.

According to a survey conducted by Statistics Korea, the Financial Supervisory Service and the Bank of Korea, as of the end of March, the average amount of assets owned by a household in Korea was 325.57 million won ($308,245), up 0.7 percent from 323.24 million won last year. The average amount of debt held by each household in the cited period, however, was 58.18 million won, which is 6.8 percent higher than the previous year’s 54.5 million won.

“Of the average amount of loans held by each household, 68.2 percent were loans from financial institutions,” said an official from Statistics Korea. “By age group, the largest amount of debt was held by householders in their 50s and they were mostly self-employed.”

The joint survey of 20,000 random households was conducted April 1-18. Figures for assets, debt and net assets were gathered from the end of March last year, while average income and spending were based on 2012 and 2011 statistics.

It was the second survey of its kind conducted by the three state agencies.

In the first half of this year, the country’s household debt - including mortgages and credit card purchases - reached a record 980.4 trillion won, up from 963.8 trillion won as of the end of 2012.

The volume of household debt has been rising since the government introduced a record-low benchmark interest rate in 2009 following the global financial crisis triggered by the collapse of Lehman Brothers.

Once policy makers in major economic countries including Korea start to raise benchmark interest rates back to normal as a result of recovery, households are expected to be under a heavier financial burden.

In its monthly economy review, the Hyundai Research Institute noted that “policies to ensure soft landing of household debts” are needed.

“The growth rate of consumption remained weak due to the sharply rising household debt and deposit-based rent,” according to the institute.

Yesterday’s joint survey showed that high household debt is dragging down spending. Average spending by each household in 2012 was 23.02 million won, while this year the volume inched up only 0.2 percent to 23.07 million won.

The amount of debt payments for each household was 5.06 million won last year, but the figure jumped to 7.09 million won this year, according to Statistics Korea.

Also, only 59.7 percent of debtors said they were able to pay back loans within the date of maturity, while 32.2 percent said they would be able to pay back their debt if they would be given more time. About 8 percent, however, said they were not financially stable enough to repay their loans.

Despite concerns, however, Bank of Korea Gov. Kim Choong-soo told reporters last Friday it is unlikely that Korea will have to endure a household debt crisis.

“The possibility is very low that there will be an immediate crisis where debt held by individuals and corporations will threaten the stability of financial institutions,” Kim said, mentioning the outbreak of the subprime mortgage crisis in the United States five years ago and the asset price bubble in Japan in the late 1980s.

His remarks were made amid speculation that with the current pace of increase, Korea’s household debt figure will reach 1,000 trillion won this year for the first time.

“There is a difference in the burden a society holds between an individual with solid financial assets having debt and an individual without such assets having debt,” Kim said. “The amount of household debt held by low-income households isn’t that big overall.”

BY LEE EUN-JOO [angie@joongang.co.kr]