(EDITORIAL from Korea Herald on July 19)


Financial authorities must take action to address the escalating household debt issue to avoid a potential crisis. South Korea’s debt service ratio (DSR) was 13.6 percent in 2020, the second-highest among 17 major countries, according to the Bank of International Settlements. Australia had the highest DSR at 14.7 percent. The DSR indicates the amount of income that goes towards paying off debt. Korea’s DSR rate has been rising quickly, increasing by 0.8 percentage points in the last year, the second-highest rate after Australia’s 1.2 percentage point rise. In addition, the country’s household debt to gross domestic product ratio was 105 percent at the end of last year, the third-highest among 43 countries surveyed. In June, household debt rose by 5.9 trillion won, the largest increase in 21 months. This was mainly due to the recovery of the real estate market and the relaxation of past property purchase regulations. The Bank of Korea warned that the high level of household debt could lead to lower long-term growth and a greater wealth disparity if policymakers continue to ignore the issue. The central bank suggested that authorities reduce the number of cases in which DSR loan regulations are not applied and make it harder for individuals to take large loans by charging additional interest on interest-only loans. Most of the household debt is held by those in the upper 40 percent income bracket, which accounts for 76 percent of the total debt. Banks are providing these individuals with loans that offer higher profits and have a low risk of default. Low interest rates have also encouraged people to invest in assets. Policymakers have been attempting to tackle the rising household debt for two decades, but their efforts have been largely unsuccessful. The Bank of Korea has kept the base rate at 3.5 percent for the last four months as consumer prices have risen 2.7 percent from the previous year. Although this is a positive sign, it should not be used as an excuse to take out more mortgages for speculative investments, which could result in a larger household debt. BOK Governor Rhee Chang-yong has stated that household debt is one of the most significant issues in the economy and that the central bank’s main objective is to ensure a soft landing for household debt. The increasing household debt is not only a hindrance to the growth of the Korean economy, but a potential time bomb that could cause a financial system collapse. Policymakers must take the household debt issue seriously and come up with comprehensive measures that include macroeconomic and monetary policies before it is too late.

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