The Vicious Cycle of Debt... How 30-40s Buying Homes Are Driving Household Debt Growth

Most of Income Goes to Principal and Interest Repayment Due to Excessive Debt... Consumption and Savings Shrink
Share of Mortgage Loans for Under 30s Rises from 26% to 32% in 4 Years
Net Financial Assets of 30s and 40s at -10 Million Won Last Year, Only Age Group in Negative

[Asia Economy reporters Kangwook Cho and Minyoung Kim] The 30s and 40s age group, known as the 'economic backbone,' has been found to be increasing household debt, the biggest risk factor for our economy. They tend to buy homes despite excessive debt, pouring most of their income into principal and interest repayments. Consumption, as well as savings and other financial assets, have significantly shrunk.

According to the 'Household Principal and Interest Repayment and Fund Management Behavior Review Report' released by Hana Financial Management Research Institute on the 12th, as of the end of June last year, the proportion of customers aged 30 or younger who took out mortgage loans (including jeonse loans) from Hana Bank was 32%, up 6 percentage points from 26% at the end of 2015. During the same period, the proportion of customers in their 40s remained the same at 34%, while the proportions of those in their 50s and 60s or older decreased by 2 and 3 percentage points over four years, recording 23% and 11%, respectively. This analysis was based on 322,500 customers who took out mortgage loans from the bank.

Kim Sujeong, senior researcher at Hana Financial Management Research Institute, analyzed, "This is the result of a complex interplay of real demand driven by family separation and rising living costs, and the expansion of real estate investment demand among young people using debt."

In fact, according to the age distribution of apartment sales transactions in Seoul last year announced by the Ministry of Land, Infrastructure and Transport and the Korea Real Estate Board, those in their 30s and 40s accounted for 28.8% and 28.7%, respectively, exceeding half of the total.

[Image source=Yonhap News]

Also, more than 7 out of 10 households in their 30s and 40s were in debt. As of last year, the proportion of debt-holding households was 75.3% for those in their 30s and 76.0% for those in their 40s, significantly higher than 72.1% for those in their 50s and 47.7% for those in their 60s. Additionally, the proportion of debt-holding households under 30 surged from 51.8% in 2014 to 57.0% in five years. For those in their 30s, it increased by 2.2 percentage points compared to 2014.

The 30s and 40s, who went all-in on buying homes by incurring excessive debt, saw their net financial assets (financial assets minus liabilities) sharply decline due to increased principal and interest repayment burdens and a rapid decrease in savings. The net financial assets of households in their 30s and 40s, which had soared to the mid-10 million KRW range in 2014, fell to negative 10 million KRW last year. All other age groups except these maintained positive net financial assets. It is analyzed that while the 30s and 40s increased their assets by purchasing expensive homes with bank loans, most of their disposable income is spent on principal and interest repayments and living expenses.

It is not only the 30s and 40s. As debt increases, the number of customers at commercial banks who feel a burden on their livelihood or have reached a risk level due to principal and interest repayments is rapidly increasing. Comparing the distribution of borrowers by total debt service ratio (DSR) groups at the end of 2015 and the end of June last year, the stable group (DSR below 20%) decreased from 56% to 46%, while the livelihood burden group (DSR 20-40%) increased from 27% to 31%. Even the high-risk group (DSR above 40%) rose by 5 percentage points from 18% to 23%. High-risk households have a heavy burden of principal and interest repayments and find it difficult to repay debts even if they sell assets.

A more serious problem is that most debt-holding households are disposing of their current financial assets such as savings, trusts, and insurance to repay their debts. According to Hana Bank’s review of deposit and loan changes from the end of 2015 to the end of June last year for 167,000 customers holding both mortgage loans and deposits of 1 million KRW or more, in the high-risk group, the balance proportions of most financial products except bank deposits and housing subscription savings decreased, including bancassurance (17%→13%), investment trusts (8%→7%), and trusts (17%→14%). In terms of amounts, while the DSR stable group showed an increase in balances across all product categories including short-term and income-generating products, the high-risk group saw a sharp decline in all financial product deposits except for pension-type products. This suggests that in the high-risk group, regular deposits and insurance premium balances have sharply decreased compared to other groups, indicating a significant number of early terminations of these products due to debt repayment burdens.

Senior researcher Kim said, "The process of inducing installment repayment of principal and interest can reduce the scale of household fund management and hinder the formation of financial assets in terms of returns." He added, "It also concludes that debt repayment may strengthen the short-term tendency of market funds." He further pointed out, "Financial institutions need to respond to the decrease in household deposits due to debt reduction, and especially, risk management should be strengthened for households just below the DSR threshold."

This content was produced with the assistance of AI translation services.