Household debt high, but manageable
According to data by the Bank of Korea, the country’s total household debt stood at 1,024.8 trillion won as of March, accounting for 85.6 percent of GDP. Surpassing the 80 percent mark is considered exceeding critical mass, which means the debt level could threaten economic growth, the report said.
However, the report by the state-run economic think tank analyzed the composition and distribution of household debt and much of the total debt was incurred at households that are considered financially capable.
The report said that about 50 percent of the country’s household debt came from households in the top 20 percent in terms of assets. It also said that 75 percent of the total debt is at households in the top 40 percent in assets.
The report also said that in the top 40 percent of households, the amount of debt does not exceed the family income, making the possibility of not paying back the debt reasonably low. The loan-to-value (LTV) ratio had been effective in this case, the report said.
The LTV ratio is a gauge used by banks to determine the amount of a home-backed loan based on the market value of the house. The rate varies by city, but the average is 50 percent of a house’s worth in Seoul and its metropolitan area and 60 percent in rural regions.
By law, Korea’s LTV ratio is set high compared to other countries in the Organization for Economic Cooperation and Development (OECD).
But the actual ratio in the market stood at 49.4 percent, much lower than the OECD average of between 61 and 80 percent.
After Choi Kyung-hwan, nominee for the double post of deputy prime minister for the economy and finance minister, hinted at easing the debt-to-income (DTI) and LTV regulations for mortgage loans, the nation’s household debt problem gained public attention again. The comments also gave insight into what Choi would focus on in his new role.
The Financial Services Commission has been conservative about easing the LTV and DTI rules due to record-breaking levels of household debt. The financial authority’s primary concern is that if the ratios are increased, consumers will be able to take out more loans without additional collateral, and their inability to pay back the loans might lead to bankruptcies of households and financial institutions.
The institute also said that loss absorption capacities of Korean financial institutions are considered sufficient.
However, it said that increasing household debt at secondary financial institutions borrowed by low-income households should be monitored because increasing such debt could hinder economic growth.
“Increased debt at nonbank institutions, short-term borrowing and household assets largely made of properties are worrisome factors,” said Kim Young-il, a research fellow at the institute.
BY SONG SU-HYUN [firstname.lastname@example.org]
More in Economy
Better to give property than to receive a big tax bill
Border restrictions drastically cut North Korea's trade
Central bank holds rates steady, adjusts up GDP forecast
Restaurant coupons to make a comeback as an app
[INTERVIEW] Korea Forest Service head sees huge opportunity in Indonesia