Concerns have been deepening about the ballooning household debt in South Korea.

As of end-June, the country’s household borrowings amounted to a record high of 1,257.3 trillion won ($1.149 trillion), up 11.1 percent from a year earlier, according to data from the Bank of Korea.


The ratio of household debt to disposable income stood at 145.6 percent at the end of March, a 4.9 percentage point increase over the previous six months. The increase surpassed the average annual rise of 3.1 percentage points for the period between 2005 and 2014.

A recent report from the Bank for International Settlements showed Korea’s ratio of household debt to gross domestic product climbed by 4.5 percentage points from a year earlier to 88.8 percent in the first quarter of this year, the eighth-highest among the 42 countries surveyed. The rate of increase was the third-fastest.

Many economists describe the household debt problem as a time bomb that could rattle Asia’s fourth-largest economy, which has been struggling with declining exports and flaccid domestic demand.

What is particularly worrisome for them is an increase in the number of households whose debts exceed their financial assets.

According to BOK data recently submitted to an opposition lawmaker, the number of such excessively indebted households that spend more than 40 percent of disposable income to service debt is estimated at about 1.34 million at the end of March last year, up 200,000 from three years earlier. Financial debt owed by these marginalized households also rose from 208.8 trillion won to 234.5 trillion won over the cited period.

The central bank estimates that financially marginalized households, which account for 12.5 percent of the total households, hold nearly 30 percent of household debt.

A 1 percent hike in interest rates would increase the number of financially vulnerable households to about 1.43 million, BOK analysts say.

The average interest rate on fresh household loans extended by local banks remained at 2.95 percent in August, down 0.01 percentage point from the previous month. The August reading marked the fifth consecutive month of drop, with the BOK holding the key rate at a record low of 1.25 percent since June.

Lower rates could prompt households to borrow more money to buy homes and make other investments.

But economists note the downward trend in interest rates might be reversed when the US Federal Reserve raises its policy rate possibly in December, having an impact on financial markets in emerging economies, including Korea.

The steep rise in household debt over the past years is attributable mainly to measures taken by President Park Geun-hye’s administration to ease conditions on mortgage loans in a bid to boost property markets and thus help shore up the faltering economy. Over the past 3 1/2 years since Park took office, household loans have increased by 285.3 trillion won, surpassing the corresponding figure of 275.8 trillion won for the five-year presidency of her predecessor Lee Myung-bak.

Alarmed by the rapid increase in household debt, the government this year has announced a string of measures aimed at curbing demand for mortgage loans. In August, policymakers vowed to control the supply of new apartments.

“The government is just sending a signal that it won’t let real estate prices fall further,” said Ha Joon-kyung, a professor of economics at Hanyang University in Seoul.

“This will only make it harder to curb household debt increase,” he said.

But financial authorities express confidence that the debt problem will be manageable.

Officials at the Financial Supervisory Commission say that growth in mortgage loans has been slowing since tighter lending guidelines have been put into practice across the country in May.

Economists admit it is difficult to take drastic measures to reduce household debt, which might result in dampening the property market and pulling the whole economy deeper into downturn.

But they say the government should pursue policies to settle the household debt problem fundamentally over the long term.

In particular, they call for preemptive debt restructuring for households saddled with excessive debts through the readjustment of repayment methods and interest rates.

Ha said the government also needs to expand fiscal spending to help boost domestic demand so that efforts to curb household debt will not cause the economy to cool down.

Experts note a fundamental way to settle the debt problem is to increase household income, particularly for the low-income bracket.

According to figures from Statistics Korea, the average household income amounted to 4,306,000 won in the second quarter of the year, a mere 0.8 percent increase from the same period last year. Adjusted for inflation, the household income remained unchanged over the cited period.

By Kim Kyung-ho (khkim@heraldcorp.com)