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[Herald Interview] Korea faces household debt crisis

The vexing debt problem has come back to haunt the Korean economy. Back in the late 1990s, the economy suffered from humongous corporate debts, but this time it is mounting household debt that has set alarm bells ringing. 

“South Korea’s surging household debt could trigger a serious economic crisis,’’ Jun Sung-in, an economics professor at Hongik University, told The Korea Herald in an interview on Thursday.

“The government’s latest push to ease regulations on home mortgages will increase household debts, which are already getting out of the hand.” 

After the Asian financial crisis in 1997, banks turned to household loans, especially in the form of mortgages, as the government tightened rules on corporate lending amid corporate restructuring to pull the country out of the crisis. Before the crisis, Korean banks had heavily depended on interest income from corporate loans. 

While household debts have gradually increased over the past decade, the situation no longer appears safe. According to the OECD, South Korea’s household debt increased by an annual average of 8.7 percent from 2008 to 2013, while the United States and Japan saw a 0.7 percent and 1.1 percent drop respectively. The nation’s household debt exceeded 1,000 trillion won ($977 billion) for the first time last year. 

“The government’s push to encourage more debt to buy houses is risky in this aging society in which the housing prices will eventually fall. When the housing bubble bursts, the insolvency of the mortgages will bring down the value of other assets,” Jun said. 

He said that instead of encouraging more households to take out loans, the government should focus on revitalizing the domestic market. 

“The government should encourage consumers to spend more money in the domestic market by supporting low-income families or small and medium-sized enterprises through wage increases.”

He pointed out that consumers who spend money in the domestic market are usually low-income people or the middle class, not the rich. 

“People in the lower income brackets tend to spend their money on food or clothing when they have a disposable income. The rich tend to invest it in the financial market or buying imported goods, which is not helpful for boosting the domestic market,” he said. 

Supporting small and medium-sized enterprises to help raise wages is also important, he pointed out. In order to prevent large companies from 
suffocating their subcontractors by slashing prices, regulatory intervention is necessary, he added. 

“The government can provide financial incentives to large companies that pay more than the market price to their subcontractors. The companies which pay lower prices should pay more taxes,” the professor said.

By Shin Ji-hye (shinjh@heraldcorp.com)