Korean household debt grows faster than that of 5 major economies

While five major economies, namely the United States, Japan, the United Kingdom, Germany, and France, have reduced the principal burden of household debt over the past five years, South Korea’s household debt has grown over the same period while its repayment capability has worsened.

The ratio of household debt to gross domestic product (GDP) jumped to over 101 percent, the fourth highest globally. This is a legacy of the previous Moon Jae-in administration’s inaction on household debt after the country was swept into a real estate craze.

Recently, the delinquency rate soared to the highest level in three years and six months as borrowers’ repayment burden increased due to prolonged high interest rates. A high-level party council meeting is expected to be held this week to discuss countermeasures.

According to a survey conducted by the Federation of Korean Industries (FKI) at the request of Maeil Business Newspaper on Wednesday, based on data from the Bank of International Settlements (BIS), Korea’s total debt service ratio (DSR) has risen 2.2 percentage points in the past five years, compared with a 0.2 percentage point drop in five major economies over the same period. Korea’s DSR rose to 14.1 percent in the first quarter this year from 11.9 percent in 2017, while the DSR in the five major countries fell to 7.2 percent from 7.4 percent during the same period. The DSR compares one’s debt commitment to annual income.

The pace of household debt growth in Korea has also been faster than in the five major economies. The total debt-to-income ratio (DTI), which measures the total debt owed as a percentage of annual income, soared to 209.8 percent in 2021 from 181.8 percent in 2017.

It also rose as much as 28 percentage points in just five years of the Moon Jae-in administration. Although it fell to 204 percent 2022, Koreans still owe debt equivalent to more than twice their annual income. In contrast, the DTI of the five major economies was up only 2.3 percentage points to 120.3 percent in 2021 from 118 percent in 2017.

Korea’s household debt-to-GDP ratio was 101.5 percent in the first quarter of 2023, while it was 68.1 percent in Japan, 73.6 percent in the U.S., and 54.3 percent in Germany, according to BIS. Korea’s household debt rose to 1862 trillion won ($1.38 trillion) in the first half of this year from 1450 trillion won in 2017. “Household debt, including mortgages, has increased significantly since 2017 due to the real estate investment boom,” according to Lee Sang-ho, head of the economic research team at the FKI.

A high-level party council meeting is scheduled to discuss the issue as increasing voices call for active management of household debt. “There are great concerns over borrowers’ debt repayment burden and soundness of household debt,” Korea Institute of Finance senior research fellow Shyn yong-sang said.