Mounting household debt

Household debt backed by real estate is near a boiling point. It surged 8.7 trillion won ($7.9 billion) in August, another monthly record. Mortgage-backed loans increased even during the traditional slow summer season. Credit-backed consumer loans also jumped. The average home value has topped 300 million won across the nation and 500 million won in Seoul. Home values in southern Seoul are hovering beyond the levels when bubbles were at their peak in the mid-2000s.

The latest government actions to curb household debt only ended up refueling the real estate market. Apartment prices rose 0.2 percent last week to a new annual peak. Showrooms are packed and new apartment offers are hugely oversubscribed.

Household debt levels have reached alarming levels, both in quantity and quality. Consumer debt hit 1,257 trillion won as of the end of June , double the amount in 2007. For five years under the previous conservative government, household debt added 276 trillion won and 351 trillion won over the three years under the incumbent government. The debt increase is near 10 percent even as the economy has been running at a pace of mid-2 percent this year and household income contracted in the second quarter. Household debt against disposable income hit 164 percent last year, the world’s highest.

There is a limit to the policy of sustaining housing prices through debt. Consumption is dampened by an increase in debt rather than increased asset value from higher home prices. The International Monetary Fund in a recent report estimated that a 1 percentage-point rise in debt ratio reduces consumption by 0.06 percent. Economic data and sentiment go in different directions because of real estate. The only gain in the gross domestic product data over the last year was in the construction sector. Without the real estate market, the economy actually grew about 1 percent.

Growth cannot be sustained in such a way when there is no longer room to push interest rates further down. Restructuring actions could be delayed and economic fundamentals weakened. Authorities must deal with household debt and real estate prices even at the risk of undermining growth.

The IMF also has warned that the debt-to-income ratio of Korea is too high compared to neighboring countries. It advised it should gradually be lowered to between 30 percent and 50 percent from the current 60 percent through subtle navigation to steer a slow landing of the real estate market. The government must take concrete actions to address the overheated market by toughening regulations for new home purchases and group loans instead of cowardly steps to fend off speculative forces.

JoongAng Ilbo, Sept. 9, Page 30