Reining in household debt

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Reining in household debt

After the government last week announced measures to curb household debt, the real estate market has only heated up further. The investment frenzy in redevelopment projects in southern Seoul has spread to other parts of the capital, as showrooms for new apartments are packed with bigger crowds. Just like last year, more than 180,000 new units are expected to go on sale through the end of the year.

It is no surprise that this real estate boom shows no sign of slowing given the government’s unimpressive package of measures. Experts had expected tough action designed to scare off speculative demand. They expected to see tougher eligibility requirements for buying new homes such as restrictions on resale and tougher guidelines on group loans for new apartment complexes.

But the government’s measures were surprisingly lenient, raising questions as to whether authorities had any will to control ballooning household debt. In fact, they suggest that the government still hopes the real estate boom will revive the local economy, regardless of the yawning balance in household debt.

The astronomical 1,257 trillion won ($1.12 trillion) in household debt can wreak havoc on the economy. Korea’s household debt compared to GDP and disposable income is the world’s highest. In the first half alone, household debt jumped 54 trillion won after the government expanded bank liquidity to back mortgage loans, leading people to extend their loans on new homes. Household debt growth now more than triples the pace of income growth.

The phenomenon is neither healthy nor sustainable. A real estate bubble could bring down the entire economy. Yet the government seems to fear a cooling real estate market could dampen the economy. It fails to consider the consequences of an overheated market. After all, American bureaucrats also felt assured that the economy was doing well until the subprime mortgage crisis in 2008.

The real estate market is not a future indicator but a by-product of economic performance. When the economy does well, trade and value picks up. Trying to stimulate the economy by heating the real estate market is risky and inefficient. In fact, consumption only shrivels because of the debt burden. Yet authorities fail to realize they have used the wrong prescription for too long.

The global economy faces another test. The U.S. Federal Reserve is warning markets around the world that it is ready to raise interest rates. Korea, too, cannot keep rates low forever. Authorities must come up with an exit policy instead of making things worse.

JoongAng Ilbo, Aug. 30, Page 34
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