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[Editorial] Preventing crisis

Measures needed to cope with household debt

Nov. 26, 2015 - 17:46 By KH디지털2

The alarmingly fast pace of the growth of household debt should alert government policymakers as it is emerging as a major macroeconomic risk factor in the Korean economy. 

Central bank figures show that household credit surged to a record-high 1,166.4 trillion won ($1.01 trillion) in the third quarter. This represents a growth of 3 percent -- also record pace -- or 34.5 trillion won from the previous quarter and an expansion of 10.4 percent or 109.6 trillion won from a year before.

Economists warn that household credit may exceed 1,200 trillion won by the end of this year.

It is not hard to tell what drove the rapid increase of household debt. With the interest rates held down to record-low levels, government eased rules on bank loans to resuscitate the property market and initiated pump-priming measures. As rents are skyrocketing, more people took out mortgages to buy homes, taking advantage of the low interest rates.

In recent months, anticipation that the U.S. will soon increase interest rates and the Korean government’s move to curb home-backed lending may well have accelerated the pace of the growth of household debt.

One may not need any more authoritative analysis or statistics to point to the gravity of the situation, but the Institute of International Finance recently aptly issued a report that the Korean ratio of household debt to GDP had reached 84 percent, the highest among 18 emerging economies.

It seems that government officials are heeding some of these concerns. They announced some measures to tighten household lending -- like strict screening of borrowers’ ability to repay and disallowing borrowers a grace period for repaying the principal on their loans.

These are steps necessary to prevent household debt from putting the economy into a crisis, but they might not be sufficient. Officials need a more comprehensive approach considering, among other things, supply and demand in the housing market, the health of financial firms and ways to boost household income.