Worry at new high household debt

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Worry at new high household debt

Outstanding household debt and credit purchase have increased significantly to more than 1,100 trillion won ($920 billion), setting a new record and deepening concerns about households’ financial health amid rising volatilities in both local and emerging Asian financial markets.

According to the Bank of Korea on Tuesday, household debt and credit purchase, which include unsecured loans, reached 1,130.5 trillion won by the end of June. This is the highest amount since the central bank began compiling the data in 2002. It broke the previous record set in the first three months of this year as it added 32.2 trillion won or 2.9 percent to that quarter’s total of 1,098.3 trillion won.

Household debt and credit purchase have been breaking new records for more than two years since the first quarter of 2013. The expansion of debt has been building up since the central bank made a series of interest rate cuts in hopes of stimulating the economy starting August 2014. Since lowering interest rates from 2.5 percent to 2.25 percent the central bank has made four cuts, which lowered the key borrowing rates to a historic low of 1.5 percent.

Experts worry that explosion of household debt, on the back of increased volatilities in both local and global financial markets, may have negative repercussions if and when market situations turn for the worse.

“Household debt is not likely to spark a financial crisis. But if external risks grow, household debt could become a catalyst that spreads financial instabilities,” said Lee Joon-hyeop, a researcher at Hyundai Research Institute.

Analysts say that when combined with other risk factors including a potential U.S. rate hike this year, the slowdown of emerging economies and the latest free fall in the Chinese markets since the yuan devaluations, household debt has the potential to bring about bigger troubles.

“In the past week, external issues surrounding the Korean economy appear highly unstable. And local economic variables, one of which is household debt, appear risky,” said Kim Sang-jo, a professor at Hansung University.

Looking at the breakdown of credit, household loans stood at 1,071 trillion won and merchandise credits 59.5 trillion won, up by 92.6 trillion won and 2 trillion won each from a year ago.

While household lending from commercial banks dipped by 0.2 trillion won, lending from nonbank depository firms grew 5 trillion won from the previous quarter. Loans from other financial institutions including insurance companies rose significantly by 26.8 trillion won. Merchandise credit grew by 0.5 trillion won in the second quarter to 59.5 trillion won.

Market experts also say that while household credit grew alarmingly fast, the majority of the debt growth was due to an increase in home sales by individuals with relative financial health.

The rapid rise in jeonse (lump sum payment) prices and increase in the volume of wolse, a combination of a security deposit and monthly rent, turned renters into home buyers, they say.

“Loan growth does not yet appear to be due to speculative investment, but based more on real needs [of a home owner],” said Lim Il-seob, a researcher at Woori Finance Research Institute.

“I do not think risk of defaults is very high,” Lim added.

Meanwhile household borrowing is expected to continue rising in the second half.

“There will be more demand for funds as the moving season comes about [in fall]. The housing market is still doing well, and this will prompt more households to borrow,” said Lim Jin, a researcher at the Korea Institute of Finance.

BY PARK JUNG-YOUN [park.jungyoun@joongang.co.kr]
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