Household debt soars by $462 billion in October

Korea’s household debt increased at the fastest pace in at least a decade after President Park Geun-hye loosened lending requirements and the central bank cut borrowing costs.

Bank lending to households rose 6.4 trillion won in October to 507.7 trillion won ($462 billion), the biggest gain since the Bank of Korea began compiling the data in 2003. Mortgage lending and borrowing for long-term rent, or jeonse, jumped by 5.5 trillion won to 355.1 trillion won.

Park’s government is using credit in an effort to stimulate consumption to meet its economic expansion target. That comes with risks, with higher household debt making sustained growth less robust, Fitch Ratings said this week.

“We are seeing growth that is more dependent on debt,” said Park Chong Hoon, an economist at Standard Chartered Plc’s Korean unit. “It’s not yet a crisis level, but it would be better to see South Korean companies taking on debt more than households.”

The central bank has reduced borrowing costs by 50 basis points since August to a four-year low of 2 percent as it cut growth and inflation forecasts. Finance Minister Choi Kyung Hwan has pledged to use 31 trillion won of stimulus this year and a record 376 trillion won budget for 2015 to boost demand.

His stimulus package included looser rules for home mortgages that allowed homebuyers to borrow up to 70 percent of a property’s value, up from the previous ceiling of 60 percent.

The government plans to address rising household debt through measures to encourage income growth. Choi is awaiting approval from lawmakers for a proposal to introduce a 10 percent tax penalty on excessive cash reserves at companies that could be spent instead on wages, dividends and investment.

The proposal would be effective through 2017 if approved by the National Assembly.

“To boost income growth, the government can strengthen incentives for companies to raise wages and develop new drivers of growth, such as services,” said Ronald Man of HSBC Holdings Plc in Hong Kong.

Total household debt, which includes lending from all financial institutions, credit card companies and insurers, rose to a record 1,040 trillion won in June, while the ratio of debt to disposable income grew to 135.1 percent, the highest level since 2007.

Part of the rise in debt is due to a spike in jeonse, under which a tenant is required to pay the landlord a lump-sum deposit, typically more than half the value of the property, instead of monthly rent.

A sluggish property market has prompted an increasing number of people to favor renting over buying, according to the financial regulator.

“The scenario that concerns me is if there is sudden stress in the labor market resulting from a sudden drop in external demand,” said Barclays economist Wai Ho Leong.

In order to consider a more positive rating for South Korea, the nation will need to show sustainable growth without rising indebtedness in households, the government and the state sectors, Andrew Colquhoun, head of sovereign ratings Asia Pacific at Fitch, said yesterday in Seoul.

Bloomberg