Household Debt Soars by 474 Trillion Won in 5 Years of Moon Administration... "Will Become an Economic Time Bomb"

Household Credit-to-Disposable Income Ratio at 174%
Increased Loans Due to Yeongkkeul and Debt Investment... Household Burden Intensifies
Inflation and Interest Rate Hikes... Economic 'Time Bomb'

Since the inauguration of the Moon Jae-in administration, household debt has surged by 474.308 trillion won. This represents a steep increase compared to the Lee Myung-bak and Park Geun-hye administrations. Because debt has grown at a faster pace than household income or gross domestic product (GDP), various indicators reflecting the soundness of household debt have also deteriorated. With the ongoing trend of interest rate hikes amid global inflation concerns, there are worries that the sharply increased household debt could act as a ticking time bomb for our economy in the future.

According to the Bank of Korea on the 23rd, as of the end of December last year, the total household debt combined with sales credit amounted to 1,862.0653 trillion won, an increase of about 474.3082 trillion won (34.1%) compared to the end of the second quarter of 2017, right after the Moon Jae-in administration took office (1,387.7571 trillion won). Considering that household debt increased by 281.415 trillion won over the five years of the Lee Myung-bak administration, the growth rate is rapid. In fact, in just the past year alone, household debt in South Korea increased by 134.1 trillion won, marking the second-largest increase ever recorded.

The problem is that the speed of debt growth compared to income growth is fast, causing household financial soundness to noticeably worsen. Looking at Bank of Korea statistics, the ratio of household credit to disposable income was 152.9% at the start of the Moon Jae-in administration but rose to 173.9% as of the third quarter of last year. This means that household debt is more than 1.7 times the income households earn and can use. While income growth has maintained a 2-4% increase over five years, the debt growth rate surged from the 4% range in 2019 to 9.6% in the third quarter of last year.

In recent years, nationwide real estate prices, including apartments, have soared, leading to a significant increase in loans for jeonse (key money deposit) and home purchases, as well as a continuous rise in demand for funds for stock investments. The craze for 'Yeongkkeul' (borrowing to the limit) loans and 'Debt Investment' has increased household burdens. Accordingly, the ratio of household credit to nominal GDP also rose by more than 13 percentage points, from 78% in the second quarter of 2017 to 91.2% in the third quarter of last year. Among experts, there are calls for proactive improvements in management structures since the debt scale has reached a critical threshold.

Due to global inflation concerns, many expect the Bank of Korea to raise interest rates at least twice this year, pointing out that household debt risk could become the biggest threat to our economy. According to data recently released by the Korea Economic Research Institute, if the base interest rate rises by 1 percentage point, the annual interest burden on households would increase by a total of 18.4 trillion won. Calculated per household, this amounts to about 876,000 won annually.

Although the government strengthened loan regulations to manage the surging household debt, resulting in a significant decrease in household credit growth to about 13.4 trillion won in the fourth quarter of last year, both presidential candidates Lee Jae-myung and Yoon Seok-youl have pledged some loan relaxations, raising the possibility of further expansion in debt size. Candidate Lee has also proposed expanding the loan-to-value ratio (LTV) for mortgage loans from the current 40-50% up to 90% as part of easing real estate regulations.

Kang Sung-jin, a professor of economics at Korea University, said, "Household credit relative to GDP has reached the highest level in the world, and interest rates are expected to rise further, so the expansion of household debt will become a ticking time bomb for our economy." He added, "Especially for low-income groups, the interest burden due to rising rates will inevitably be greater, so government-level management is necessary."

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