1700 Trillion 'Household Debt' Time Bomb?…Different Perspectives Between Government and Private Research Institutes

Household Debt Surpasses 1,700 Trillion Won for the First Time at End of Last Year
Research Institutes Offer Divergent Outlooks on Household Debt Amid Rising Interest Rates
Korea Tax Institute "Concerns Over Economy-wide Shock" VS Korea Financial Institute "Low Risk Visibility"

[Image source=Yonhap News]

[Asia Economy Reporter Park Sun-mi] Last year, household debt in South Korea exceeded 1,700 trillion won for the first time, and two research institutes?the government-funded Korea Institute of Public Finance and the private Korea Financial Research Institute?offered differing analyses.

According to the financial sector on the 5th, the government-funded Korea Institute of Public Finance expressed concerns that the pace of household debt growth in Korea is faster than in major advanced countries, and that this could become a trigger for domestic economic shocks if it coincides with a period of rising interest rates. On the other hand, the private Korea Financial Research Institute viewed the risk of household debt becoming problematic as low, since the rise in short-term interest rates (0-3 years), which affect household debt interest, is expected to be limited.

According to the report titled "Trends and Comparisons of Total and Sectoral Debt by Country" published by the Korea Institute of Public Finance, as of the second quarter of last year, Korea's household debt to Gross Domestic Product (GDP) ratio stood at 98.6%. This is higher than the global average of 63.7% and the advanced countries' average of 75.3%. Since 2008, the household debt-to-GDP ratio has increased by 27.6 percentage points, a much steeper rise compared to the global average increase of 3.7% and the advanced countries' average decrease of 0.9%.

The quality of debt is also poor. In Korea, short-term debt (within 1 year) accounts for 22.8% of household debt, significantly higher than major European countries such as France (2.3%), Germany (3.2%), Spain (4.5%), Italy (6.5%), and the UK (11.9%). A high proportion of short-term debt implies a greater risk of liquidity problems. Among major countries, only the United States has a higher short-term debt ratio at 31.6%.

Korea's ratio of financial liabilities to financial assets for households was also high at 47.2% (as of 2019), compared to France (30.0%), the UK (28.7%), Germany (28.3%), and the US (17.3%). This ratio measures debt relative to immediately liquidatable assets, with a higher ratio indicating greater debt risk.

The Korea Institute of Public Finance noted that the proportion of mortgage loans in Korea's household debt was 43.9% of GDP (2019), similar to the US (49.5%), France (45.4%), and Spain (41.6%). However, it pointed out that Korea's unique Jeonse deposit system should be separately considered. When the Jeonse deposit amount is added to mortgage loans, the recalculated housing loan ratio reaches 61.2% of GDP, which is high compared to major overseas countries.

The Korea Institute of Public Finance warned, "At this point, when the scale of debt has significantly increased, a rapid rise in interest rates could lead to a sharp increase in interest expenses due to debt burdens, potentially causing shocks to the entire economy."

On the other hand, the Korea Financial Research Institute assessed the possibility of household debt risk due to rising interest rates as low.

Song Min-kyu, Senior Research Fellow at the Korea Financial Research Institute, stated in the report "Key Monitoring Items for Household Debt Risk Management" that the likelihood of household debt risk becoming visible due to rising interest rates is low. This is based on the expectation that the base interest rate will remain low for the time being and that the rise in short-term interest rates (0-3 years), which affect household debt interest, will be limited.

However, he emphasized the need for monitoring because if major bond issuances such as government bonds concentrate on short-term maturities or if foreign investment in government bonds decreases, there is a possibility that short-term interest rates could converge with long-term rates.

Research Fellow Song pointed out, "Although housing prices have continued to rise over the past three years, there is a possibility of a decline due to strengthened comprehensive real estate tax, property tax, and loan regulations, so the risk arising from this should be closely watched." He also noted, "Particularly, the debt issues of self-employed individuals and small business owners lie at the intersection of household and corporate debt, but data collection is difficult, which may hinder monitoring, so special attention is required."

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