A belated warning about household debt

But the government’s accommodation of public demand for lower borrowing rates may reflect populism.

Kim Dae-ki, chief of staff to President Yoon Suk Yeol, warned that a crisis triggered by a meltdown in the colossal household debt could be many times more disastrous than the 1997-98 financial crisis which led to an international bailout. Kim was particularly worried about leveraged home purchases and investments, which were popular when borrowing was cheap under the past governments.

The veteran economic technocrat is not exaggerating. Korea’s household debt is nearing its boiling point. According to the International Monetary Fund (IMF), the debt amounted to 108.1 percent of Korea’s GDP as of the end of 2022 — the second largest in the world after Switzerland with 130.6 percent.

The pace of the surge is also alarming. Korea showed the fastest increase in household debt over the last five years among the 26 countries in the IMF survey. Debt-financed investment from the young population did not waver under the Yoon administration despite a jump in interest rates. Personal debt per individual under 30 averaged 79 million won ($58,000) in the second quarter, up 27 percent from the same period in 2019. Debtors are also struggling with high borrowing rates. Delinquency rate among the vulnerable class — or multiple, low-credit, and low-income borrowers in their 20s and 30s — has reached 8.41 percent.

But we wonder why the warning from the presidential chief of staff, who is deeply involved in policy coordination with government ministers, came so late.

The government and the Bank of Korea have differed on measures to deal with mounting household debt. The central bank has lifted the base rate from 1.5 percent to 3.5 percent since President Yoon took office in May last year. But the government extended the scope of state-backed mortgage loans and introduced a 50-year mortgage loan, both of which only fueled household debt despite the monetary tightening. The Financial Supervisory Service even pressured commercial banks to lower their lending rates despite the base rate hike. Moreover, the lifting of real estate regulations under the past Moon Jae-in administration helped to raise apartment prices, which fueled housing demand from the young.

Household debt decreased by 7.8 trillion won last year when the government was strict on borrowing. The easing may have been necessary to prevent a real estate market slump and rent crisis. But the government’s accommodation of public demand for lower borrowing rates may reflect populism.

Maintaining macroeconomic soundness must be the top priority during crisis times. Interest rates are expected to stay high for a while, and oil prices will likely jump due to the Middle East conflict. Korea must keep populist temptations at bay and continue deleveraging efforts together with structural reforms to survive tough times like today.