The curse of household debt

A lengthy, painful war with debt awaits the country.

Lee Sang-ryeolThe author is an editorial writer of the JoongAng Ilbo. Household debt, which reached 1,876 trillion won ($1.4 trillion) as of the end of September, is the biggest imminent weakness for the Korean economy. Few of the richer-rank economies bear a household debt that outweighs its gross domestic product. Korea’s has exceeded 100 percent of its GDP since the third quarter of 2020. According to Bank for International Settlements (BIS) data, only Australia and Switzerland have such a bulky personal loan ratio. The ratio is 73.7 percent for the United States, 53.5 percent for Germany and 80.7 percent for the United Kingdom as of the second quarter.

The Bank of Korea (BOK) projects that if the household debt-to-GDP ratio tops 80 percent, there is a greater possibility of the economy growing slower or even falling into a recession. When debt is too high, consumers will have little to spend after paying off debt obligations. The debt service ratio (DSR) data backs this theory. The DSR of individual borrowers averaged 39.9 percent as of June, meaning their debt eats up much of their income. Consumption has been slowing as a result. This puts the central bank in a dilemma: A cut in the benchmark rate could further increase household debt, while a hike could push borrowers further toward the brink.

Koreans used to be strict on debt. The household debt ratio against GDP had stayed in the 40-percent range in the 1990s. Like the ultralow birth rate, the high debt ratio did not build up overnight. Every government played a part in pushing up the ratio. The spike was extraordinary under the last Moon Jae-in government. Household debt stretched by 500 trillion won during his five-year term versus 13 trillion won in the second year of Yoon Suk Yeol’s presidency.

Covid-19 was partly responsible for the sharp rise in household debt during the Moon administration. In the face of the pandemic, the BOK kept the base rate at less than 1 percent for more than 18 months to help the struggling people survive. Governments around the world were no different throughout the pandemic.

Still, the pace in the growth of household debt was uniquely fast in Korea. Stringent regulations on the real estate market only fanned borrowing. Kim Soo-hyun, policy chief under President Moon in the first half of the administration, regretted having failed to control the soaring apartment prices. He said the policy failed because the government had not been tougher on regulations and debt management.

He still has the wrong idea about the housing policy. Housing prices did not soar because of the loose monetary policy of the central bank and other financial authorities. Rather, the soaring apartment prices prompted a rush to borrow money from banks to buy apartments. Authorities trotted out the strictest possible measures; for instance, banning banks from lending loans for apartments costing more than 1.5 billion won. But the regulations could not ease the deepening apprehension about never owning a home. Cheap rates only blinded us to the danger of the ballooning household debt. The risk became a reality once rates jumped after the pandemic ended, and the aftereffects spilled over as disastrously as the Moon administration’s relentless policy on phasing out nuclear energy.

Humans tend to forget easily. Politicians erase their follies from their memory and dump them on others. The liability for the ongoing economic slowdown and the snowballing household debt will be the hot potato in the run-up to the parliamentary election on April 10. We have seen the prelude in the last regular session of the National Assembly. The majority Democratic Party, which ruled under Moon, has grilled policymakers. Rep. Yang Kyung-sook scorned BOK Gov. Rhee Chang-yong for doing little when most people were drowning in debt. Financial Services Commission Gov. Kim Joo-hyun had to speak out and reminded the lawmaker that household debt had mostly surged under the previous government due to multiple regulations.

The policy failure has been forgotten, but the debt load remains. BOK Gov. Rhee said, “Corporate debt can be reduced by restructuring, but it is difficult to do the same for household debt.” Write-offs cannot be the answer, either. New senior presidential secretary for economy, Park Chun-sup, expressed his hope that the household debt-to-GDP ratio would come down to 80 percent.

But that is easier said than done. It took the Netherlands 18.5 years and Denmark 17.7 years to bring down their household debt ratio to under 100 percent. A lengthy, painful war with debt awaits the country. Households may have to tighten their belts for a long time. We may forget how it all started. But we must never condone a bad policy.