[Insight & Opinion] Rising Household Debt: What Is the Solution?

Recently, the Bank of Korea announced that the household debt-to-GDP ratio in the fourth quarter of last year was 105%, ranking third highest among 43 major countries. As household debt, which had been on a declining trend, has shifted to an increasing trend, debates over the causes and countermeasures for the rise in household debt are intensifying. Some argue for strengthening loan regulations, while others suggest raising loan interest rates. However, since the fundamental cause of the increase in household loans lies in the rising demand for home purchases due to concerns over housing price increases, policymakers need to be cautious in devising countermeasures.

Household debt is divided into living expenses and home purchase purposes. In the case of home purchase loans, if housing prices are expected to rise, demand for home purchases increases, leading to a rise in household debt. Recently, with construction raw material prices and wages rising sharply, an increase in housing prices due to cost increases is anticipated. This is evident from the recent significant rise in housing sale prices. Young people and those without homes are rushing to buy houses before prices rise further. The Bank of Korea also analyzes that the recent increase in household debt is due to increased demand for home purchases and rising housing and jeonse (long-term lease) prices.

If the cause of the increase in household debt is the rise in housing demand due to increased construction costs, it is difficult to reduce household debt through interest rate hikes or loan regulations. Despite interest rates being significantly higher than in the past, demand for home purchases is increasing, and it is also difficult to reduce the increased demand for home purchases caused by concerns over rising sale prices through loan regulations such as DSR (Debt Service Ratio) or LTV (Loan-to-Value ratio). Strengthening loan regulations at commercial banks could shift loan demand to secondary financial institutions. Moreover, since advanced countries provide loans covering 80-90% of housing prices when purchasing homes, strengthening loan regulations is not desirable.

Then, what is the solution to reduce household debt? In a situation where it is difficult to lower rising wages and construction costs, it is necessary to stabilize housing prices by dispersing demand for Seoul city center housing to the relatively affordable metropolitan area. Currently, when housing prices in the city center rise, housing prices in the metropolitan area, which are substitutes, also increase, ultimately leading to an increase in household debt. Urban redevelopment is also a way to increase housing supply and stabilize prices, but redevelopment alone is insufficient to meet the growing demand for city center housing in the limited urban space.

To disperse demand for city center housing, it is important to expand transportation infrastructure in the metropolitan area. The reason for the increasing demand for city center housing is the excellent transportation, education, and distribution infrastructure in the city center. Policymakers should focus housing policies on reducing city center housing demand by expanding transportation infrastructure for commuting from the metropolitan area to Seoul, such as above-ground railways. While private construction companies supply housing, the government provides transportation infrastructure such as roads, railways, and tunnels. No matter how much housing supply increases by construction companies, if the government does not expand transportation infrastructure, the increased housing supply in the metropolitan area will not contribute to price stabilization, and city center housing prices will rise further, increasing household debt.

Household debt is the Achilles' heel of the Korean economy. If wages and construction costs rise due to a vicious cycle of inflation and wage increases, this will lead to higher housing sale prices and housing prices, making it highly likely that household debt will continue to increase. This increases interest burdens, reduces disposable income, lowers consumption, and slows growth. Furthermore, if interest rates rise or the economic downturn worsens, it can trigger financial instability and potentially cause a financial crisis. Policymakers should not respond to the increase in household debt by strengthening loan regulations or raising interest rates but should seek solutions by stabilizing housing prices, the fundamental cause of rising household debt.

Jungsik Kim (Professor Emeritus, Department of Economics, Yonsei University)

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