Korea’s household debt burden falls with DSR at five-year low

(Yonhap)

The debt repayment burden in South Korea relative to household income has declined for seven straight quarters, reaching its lowest level since the Covid-19 pandemic.

According to statistics released by the Bank for International Settlements (BIS) on Tuesday, the country’s debt service ratio (DSR) stood at 11.4 percent at the end of the second quarter, the lowest level in about five years since the fourth quarter of 2020.

DSR measures average household principal and interest repayment as a share of income

The ratio peaked at 12.3 percent in the third quarter of 2023, the highest level since data collection began in 1999, and has since declined for seven straight quarters.

Until the first quarter of last year, it fell by 0.2 percentage point per quarter, and thereafter, by 0.1 percentage point per quarter.

The decline comes despite continued growth in household debt, reflecting a combination of income growth, falling loan interest rates, and changes in repayment structures, analysts said.

Korea’s household DSR is higher than that of the United States (8 percent), the U.K. (8.7 percent), and Japan (7.7 percent), but lower than Norway (21.1 percent), Australia (16.3 percent), and Canada (13.9 percent).

Among 17 countries in the BIS statistics, Korea ranks seventh.

Analysts expect the slowdown in household debt growth, the Bank of Korea’s four consecutive rate freezes, and rising market interest rates in the third and fourth quarters to affect the DSR.

Meanwhile, Korea’s credit gap, which measures household and corporate credit risk relative to economic size, stood at minus 5.7 percentage points at the end of the second quarter.

The credit gap tracks how much private credit to GDP deviates from its long-term trend. A positive gap indicates credit above the trend, while a negative gap shows it is below.

An expanding negative gap can signal credit normalization but may also point to an economic slowdown or tightening credit. BIS classifies a gap above 10 points as a warning, 2 to 10 points as caution, and below 2 points as normal.

Korea’s credit gap peaked at 15.6 points at the end of the first quarter of 2021 and has trended downward since. It fell from 3.5 points at the end of the fourth quarter of 2023 to 0.2 point at the end of the first quarter of 2024, entering the normal range, and remained negative through the second quarter, marking the lowest level in about 19 years since the third quarter of 2006.

The household debt-to-GDP ratio rose slightly from 89.5 percent at the end of the first quarter to 89.7 percent at the end of the second quarter, marking the first rebound in three years since 98.0 percent at the end of the second quarter of 2022.

The non-financial corporate debt ratio fell from 111.3 percent to 110.8 percent, while the government debt-to-GDP ratio reached 47.8 percent, setting a record high for the second consecutive quarter following 47.2 percent in the first quarter.