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2023 Nov/08
Current State and Risk Factors of Household Debt in Korea
Issue Papers 23-23
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- Research Topic Macrofinance
- Page 22
- Summary
- The prolonged accumulation of household debt in Korea presents a considerable threat to the country’s economic stability. Korea’s household debt, characterized by its high level and rapid growth, requires careful management strategies to ensure stability. A close examination with a focus on individual households reveals a rising concentration of debt, particularly among households headed by those aged 44 and below.
Analyzing the impact of household leverage on consumption, this article finds that the growing debt servicing burden arising from leverage expansion hampers household consumption. Notably, households with excessive leverage experience a prominent slowdown in consumption, suggesting that future consumption growth could be limited despite income increases. Furthermore, as higher leverage magnifies household vulnerability, heavily leveraged households tend to hold smaller financial and net assets, rendering them more susceptible to economic shocks. The effects of monetary tightening become more pronounced, underscoring household vulnerabilities. If high interest rates persist over the long term, loan delinquency rates could rise among heavily indebted households, exacerbating financial distress.
Despite the macroeconomic challenges potentially posed by household debt, there remains a high risk of continuous surge in household debt, primarily driven by real estate-related loans. The prevalent trend of a significant preference for real estate investment among households raises concerns about the expansion of household debt fueled by expectations of rising property prices. In addition, the potential leverage expansion through interest-only lease loans, exempt from the Debt Service Ratio (DSR), poses an additional threat to future household debt management.
The increasing likelihood of a prolonged high-interest environment requires caution for the risk associated with the expansion of household debt. If the high-interest regime persists, the principal and interest repayment burden may rise rapidly, driven by high leverage levels. This may result in a more sluggish growth of consumption than expected, intensifying downside risks to the economy. Furthermore, an extended period of high interest rates may expose heavily indebted households to deteriorating financial conditions, increasing the risk of insolvency. Hence, it is necessary to implement stringent management measures for vulnerable borrowers and take proactive measures including reserve accumulation, aiming to prevent insolvencies within the household sector from spreading to financial institutions.