A half-baked prescription
The government has turned out a so-called comprehensive set of packages to rein in snowballing household debt that has been pinned as the biggest danger to the local economy. The measures are the result of four months of cooperation between the Financial Services Commission, Ministry of Strategy and Finance, Financial Supervisory Service and the Bank of Korea.
Household debt exceeds 1,100 trillion won ($950 billion), increasing by more than 10 trillion won every month. What’s worrisome is the accelerated pace of its growth. The annual rise of 5.2 percent in household debt in 2012 picked up to 6.5 percent last year and to 7.3 percent in the first half this year. The annual increase in mortgage-related loans that stood at around 3 percent until 2013 suddenly jumped to more than 10 percent last year.
The government tried to tone down concerns saying the default rate in household loans amounts to 0.45 percent, one tenth of the level in the United States, to argue that household debt does not pose an imminent danger to the economy. But the debts cannot stay safe if interest rates become higher with a rate hike by the U.S. Federal Reserve and a fall in home values. We have seen what harms the burst in home-related bubbles can do to the economy from the 2008 subprime mortgage crisis in the United States.
The government emphasized it was taking pre-emptive actions without dampening domestic demand and the real estate market. It will make lenders look more closely at extending new loans and rearrange loan structures to allow for installment payments. It believes household debt can be contained by restricting loans to consumers with a questionable ability to repay their debts.
But the measures do not solve fundamental problems. Household debt increased sharply because the economy and real estate market have been lethargic. Half of the new household debt went to buying homes. Due to a steep rise in rent prices over the last five years, families bought homes because rent prices were close to the sale price. Strengthening loan reviews won’t make the demand go away. At the same time, consumers need to turn to loans to keep their businesses running amid reduced income from the economic slowdown.
The measures are guidelines for lenders to follow. They are more or less orders given out to the financial institutions. How they can be implemented would depend on the government’s will. The measures are hardly inventive or farsighted. It is why we cannot agree that the government has worked hard to come up with the best possible comprehensive and pre-emptive measures.
JoongAng Ilbo, July 23, Page 30