Young people drowning in debt

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Young people drowning in debt

Debt financing by Koreans in their 20s and 30s has risen sharply this year. Their share in total household debt reached 61 percent in the first half with a surge of 28.6 trillion won ($26 billion), compared with 52 percent in December. Debt held by those in their 40s increased by a smaller volume of 15.8 trillion won while borrowing from those in their 50s jumped by 6.4 trillion won during the same period. Lending to those in their 60s or older fell 4 trillion won.

Young people without much savings tend to seek loans to get married and find places to live. The trend is more natural than in the past when loans increased in age groups that lived off of their assets as opposed to their incomes.

But the problem is the pace of growth. A borrrower in their 30s was indebted 73.98 million won on average over the last five years, up 49 percent from 49.67 million won five years ago. The growth rate has outpaced other age groups.

It would have been a smaller problem when interest rates were benign for borrowers. But interest rates are set to go higher.

Mortgage-backed housing lending rates at banks hover above 5 percent. The U.S. Federal Reserve is very likely to push up its rates again within the year. The BOK also indicated that it is ready to lift the benchmark rate from the record-low of 1.25 percent kept since June last year. Higher interest rates at a time of job insecurity and stagnant wage growth make lives tougher for young people.

Authorities must come up with buffers from an interest rate hike such as fixed long-term loans and actions to stabilize housing supplies. There is no longer space around the capital to develop large-scale affordable public housing.

The government should consider promoting commercial home-owners to rent out their homes. Young people must not fall victim to the policy of the previous government that induced them to buy homes out of debt through deregulation and easy and cheap liquidity.
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