"Low Likelihood of Household Debt Risk Becoming Visible but Potential Risk Factor"

Korea Institute of Finance: "Must Prepare for Potential Risks from Housing Price Decline"

[Asia Economy Reporter Park Sun-mi] In preparation for the potential risks arising from the decline in housing prices, it has been pointed out that detailed monitoring is needed not only of the possibility of insolvency by financial companies but also of the characteristics of borrowers and collateral properties, such as the region and price range of the collateral housing and the use of private borrowing.

On the 5th, the Korea Institute of Finance stated that since the base interest rate is expected to remain low for the time being, the rise in interest rates for 0-3 year maturities, which affect household debt interest rates, will be limited, so the risk of household debt becoming visible due to interest rate hikes is low.

However, they noted that if events such as the concentration of major bond issuances like government bonds in short-term maturities or a reduction in foreign investment in government bonds occur, there is a possibility that short-term interest rates will converge with long-term rates, so monitoring of this is necessary.

In particular, Korea’s household debt problem has a low likelihood of spreading into a financial system risk like the 2008 US subprime mortgage crisis, but it is highly likely to cause various localized issues. As of the end of the fourth quarter last year, Korea’s household debt stood at 1,726 trillion won, an 8% increase compared to the same period the previous year, and both the absolute level and growth rate have been recognized as potential risk factors for the economy.

Senior Research Fellow Song Min-gyu said, "Although housing prices have been rising continuously over the past three years, housing prices may fall in the future due to strengthened comprehensive real estate tax, property tax, and loan regulations, so the possibility of risk arising from this should be closely monitored." He added, "During the recent housing price rise, loan regulations have been continuously tightened, and it is estimated that private borrowing and purchases using jeonse (long-term lease deposits) to circumvent these regulations have been actively utilized, so jeonse prices should also be included as a key monitoring target."

He continued, "In particular, the debt problems of self-employed and small business owners lie at the intersection of household and corporate debt, but data collection is not easy, which may cause difficulties in monitoring, so special attention is required." He explained, "In preparation for cases where repayment conditions for mortgage loans within household debt become difficult, it is necessary to prearrange residential stability programs for delinquent borrowers." Additionally, he added, "Efforts should continue to create household loans that can respond to changes in housing prices, such as limited liability loans and mortgage loans linked to housing price indices."

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