Sitting on household debt

Household debt tipped over 1,200 trillion won ($972 billion) at the end of last year, up a whopping 121.7 trillion won - or 11.2 percent - from the previous year. The pace of growth is the fastest-ever. Household debt worth 1,000 trillion won at the end of 2013 jumped to 1,100 trillion won by May 2015. And it took just another seven months to add an additional 100 trillion won.

Consumer debt has escalated at an extraordinary pace due to three main factors - a low-interest rate environment, eased loan regulations and revived housing trade. In short, real estate has been behind the jump in debt. The real estate market enjoyed a boom last year with licensing for development and sales offerings being the largest ever, even as the rest of the economy remained in the dumps.

The Park Geun-hye administration has devoted itself to revitalizing the real estate market and vehemently removed all regulations related to that sector. The barriers on redevelopment and real estate prices were lifted. And strict loan regulations that hinged on payment affordability for the borrowers were also relaxed. A new type mortgage loan was introduced last year to encourage people to buy homes without having to worry about payments immediately. As a result, mortgage-backed debt expanded at a pace triple that of economic growth. Considering the sagging pace of economic and income growth, this phenomenon is hardly normal or affordable.

Domestic and foreign institutions warn that the dangerous load of household debt poses the biggest risk to the Korean economy, as it undermines the household economy, which is a key pillar to domestic demand. Debt has already weighed on consumption and demand because households have little left from their stagnated incomes to spend after they pay off the interest on their liabilities.

But the government remains laid back. Deputy Prime Minister for the Economy Yoo Il-ho said the government has no plans to directly contain or enforce de-leveraging in household debt. The plan to strengthen loan regulation in non-capital regions was pushed back to after the April elections, raising suspicions that authorities are deferring the issue out of economic and political considerations. This is why skepticism is on the rise. The public wants to know whether the government is serious about improving the fundamentals via structural reform.

JoongAng Ilbo, Feb. 25, Page 30