Korean households' debt cost rise in 5 years fastest among developed economies

[Photo by Kim Ho-young]

South Korea’s household debt burden grew fastest among developed economies last year, putting the country also that much vulnerable when interest rates turn higher, comparative data showed.

The country’s household debt service ratio (DSR), comparing a household’s required debt payments against total disposable income, averaged at 13 percent at the end of 2020, according to data published by the Bank for International Settlements (BIS) on Sunday.

Korea ranked No. 5 among 17 advanced economies in DSR on BIS scale.

But the pace of growth was fastest, adding 2.3 percentage points versus five years ago.

Among the top five countries with high DSR, only Norway and Korea had seen the ratio go up compared to the end of 2015. But Norway’s gain was one-tenth of the gain of Korea’s.

According to the Bank of Korea (BOK)’s data, the outstanding balance of household loans reached 1,216.8 trillion won ($1,076.1 billion) as of April, surging 49.8 percent from the end of 2015.

Household debt stretch is in line with steep rise in home value over the past five years.

Until 2016, the DSR gain was paltry at 0.1 percentage point. According to a latest finding from the Citizens’ Coalition for Economic Justice, apartment prices in Seoul surged 82 percent over the last four years under President Moon Jae-in.

The DSR for borrowers averaged at 35.7 percent at the end of September 2020, according to the BOK’s data. The Korean central bank’s DSR calculation method differs from that of the BIS as the international institute uses its own measurement guide to compare countries.

The debt load could develop into a bigger risk as the BOK is readying to lift the base rate from the historic low level of 0.50 percent this year. Given the governor’s stress on “normalization”, the rates could go up to 1.00 percent or 1.25 percent, the last level before emergency cuts after the Covid-19 outbreak in the first half last year.

The BOK estimates a rise of 1 percentage point in lending rate could increase debt financing cost by 11.8 trillion won.

The Korean government anticipates the household debts’ growth pace to slow down from next month upon a new cap on household loans to 40 percent of its total income for borrowings exceeding 100 million won.

[ㄏ Maeil Business Newspaper & mk.co.kr, All rights reserved]