Korea under heaviest household debt burden after Australia: data

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South Korea was under the heaviest household debt burden among major economies after Australia last year as loan principal repayment soared due to a series of interest rate hikes that continued from 2021.

According to the Bank for International Settlements (BIS) on Monday, the debt service ratio (DSR) of Korean households stood at 13.6 percent last year, the second-highest among 17 major economies after Australia at 14.7 percent.

A DSR is measured by debt principal repayments relative to income, which suggests that a higher DSR means a higher amount of the debt to be repaid.

Canada followed Australia and Korea, with its DSR at 13.3 percent, and then the Netherlands (13.1 percent), Norway (12.8 percent), Denmark (12.6 percent), and Sweden (12.2 percent).

The U.K. followed the rankings with 8.5 percent, the U.S. with 7.6 percent, Japan with 7.5 percent, France with 6.5 percent, and Spain with 5.8 percent.

Korea also ranked second in terms of the DSR growth pace.

Korea‘s DSR climbed by 0.8 percentage point in 2022 from 2021. Australia came in first with an increase of 1.2 percentage points.

Canada saw a rise of 0.7 percentage point, the U.S. by 0.4 percentage point, Finland by 0.3 percentage point, and Japan by 0.1 percentage point.

Nine economies out of the 17 countries saw a decline in DSR.

In 2021, Norway (14.5 percent), Denmark (14.2 percent), the Netherlands (13.8 percent), and Australia (13.5 percent) had higher DSRs than Korea (12.8 percent). However, in just one year, Korea surpassed all these countries except for Australia.

Korea experienced the most significant increase of 1.4 percentage points compared to the end of 2019, outpacing all other surveyed countries.

Korea’s high DSR and growth in the index came from growing pressure on household borrowers following interest rate hikes.

An interest rate hike usually results in slow growth in household debt.

The country’s household debt fell by 1.1 percent from 1,261 trillion won ($985.3 billion) to 1,248 trillion won in 2021. The decline marked the first since 2003, when the Bank of Korea began compiling related data.

On the other hand, the borrowing rate for households rose to 4.66 percent from 3.01 percent over the same period.

While household borrowers have faced increased borrowing costs, the DSR is expected to continue its upward trajectory as household debt has recently rebounded.

At the end of June, the balance of household loans at depository banks reached a record high of 1,062.3 trillion won. After a decline in March this year, bank household loans have risen for three consecutive months, with June witnessing the most significant increase in nearly two years since September 2021.

Household loans, including those from both banking and non-banking sectors, continued their growth streak, increasing by 3.5 trillion won last month, marking the third consecutive month of expansion.

The depository bank household loan rate has been on an upward trajectory. It rose to 5.01 percent in the first quarter of this year from 3.25 percent in the first quarter of the previous year.

For new loans, the rate peaked at 4.81 percent in the third quarter of the previous year and 5.52 percent in the fourth quarter. Although it fell to 5.22 percent in the first quarter of this year, the recent rise in market interest rates suggests the possibility of a further increase from the second quarter onwards.

With the volume of household loans showing signs of increase, there are concerns that soaring interest rates could place a heavier debt repayment burden on households, posing risks to financial stability.

“If household debt grows beyond expectations, the BOK may respond through adjustments to interest rates or implementing macro-prudential regulations,” said the BOK Governor Rhee Chang-yong.