FOMO is the latest epidemic as punters borrow to buy
The fear of missing out (FOMO) is the latest epidemic to hit Korea, as stocks hit new highs and housing prices soar.
People are so afflicted by it that they are taking on debt to make investments.
A 32-year-old office worker living in Seoul started investing in stocks last June after watching prices slowly recover from the coronavirus pandemic-driven plunge in March.
He withdrew all his savings to invest some 100 million won ($91,000) in Kospi and Kosdaq shares, but now that the indices keep rallying, he has started to wonder whether he should have invested more to earn more, like his colleagues who recently took out loans to expand investment.
"For me, it feels too risky to borrow to invest, but I keep thinking, 'What if?’" he said. "I can totally understand why people do it, especially because stock markets overall are just so good these days."
According to data from five major banks in Korea — KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NongHyup Bank — the unsecured loan balance at those banks increased by 453.4 billion won over just four trading days of the new year, through Jan. 7.
Though some loans were paid back by Jan. 8, the unsecured loan balance was still up by 217.9 billion won in the first week of 2021.
Generally, people pay back debt in January with year-end bonuses. In January last year, the unsecured loan balance decreased by 224.7 billion won.
Household debt has snowballed from last year. According to a Bank of Korea report last month, household debt amounted to 1,682.1 trillion won at the end of the third quarter in 2020, growing by 7 percent year-on-year. The amount outpaced the country's nominal GDP growth for the first time. Household debt to nominal GDP ratio reached 101.1 percent as of the third quarter, rising by 7.4 percentage points on year.
The report said a number of statistics suggest borrowed money was used mostly to buy property, invest in stocks and to cover living expenses.
"I think a lot of people these days really do take loans to invest in stocks," said a source from one of five major banks on condition of anonymity. "Clients don't write down their purposes on paper, but during conversation, it's easy to tell that they are using the money for investment."
Retail investors were net buyers during most of the trading days so far this year.
On Monday, retail investors net bought 4.49 trillion won worth shares, a daily record. The amount is more than double of the last record of 2.2 trillion won set on Nov. 30 last year. On Tuesday, retail investors net bought 2.31 trillion won worth stocks.
"Technically, from an economic point of view, what's important is the cost incurred in investment rather than whether it's investors' money or not, because even with their own money, there is always opportunity cost," said Shin Seok-ha, an economics professor at Sookmyung Women's University. "But with borrowed money, it could be difficult to maintain long-term investment when interest rates shoot up or the stock market plunges, because you have a due date to pay back the loans."
Shin said from the bank's point of view, it is very difficult to manage household debt at an optimal level right now, because they can't just close on loans when low interest rates are in place to help households and companies in need of support due to the Covid-19 pandemic.
"To minimize side effects on the economy, the best banks can do would be to better assess individual's ability of repayment for loan programs that are not for pandemic-related emergency support," Shin added.
On the snowballing household debt, financial institutions are planning to tighten standards on loans to reduce credit risk.
According to a central bank survey targeting loan officers at 201 financial institutions, including commercial banks, savings banks and insurance companies, some institutions will be tightening standards on loans to households and small- and mid-sized enterprises in the first quarter of this year despite growing demand for loans.
The bank said in the report that credit risks at both corporations and households are expected to rise as the real economy remains sluggish, affected by Covid-19 and related social distancing campaigns.
BY KIM JEE-HEE [email@example.com]
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