By Kim Soo-yeon
SEOUL, Oct. 22 (Yonhap) -- Despite a recent downturn in its growth, South Korea's household debt has reached a high-risk level due to a prolonged property market slump, necessitating prudent government measures to tackle the problem, experts say.
Korea's household debt, which stood at 922 trillion won (US$835.1 billion) as of end-June, has been repeatedly cited as the main drag for Asia's fourth-largest economy because households' high indebtedness is feared to curb domestic demand and thus crimp economic growth.
The regulator's tighter control on mortgage lending and local banks' strengthened health may help make a soft landing of the household debt problems, but the household debt issue warrants a close watch, given the slowing economic growth, the slumping property market and population aging, they say.
"The structure of Korea's household debt has turned worse as the property market is in the anemic state and the portion of households borrowing from multiple financial firms and that of people with low creditworthiness have been on the rise," said Jeong Young-sik, an economist at the Samsung Economic Research Institute.
Data from the central bank showed that household credit, which includes loans and credit purchases, surpassed the 920 trillion won mark, tantamount to 74 percent of the country's gross domestic product (GDP) in 2011.
But some private economists estimated that indebtedness in the private sector may reach 1,600 trillion won if combined with all borrowings not easily tallied like money for leasing homes.
Korea's household debt has grown at an annual average of some 9 percent since 2005 on the back of banks' excessive competition for extending home lending and long-standing belief that investment in the property market never fails.
Since the growth rate peaked at 11.8 percent in 2006, it has slowed to 7.3 percent in 2009, hit by the 2008 global financial crisis. But the growth picked up to the 8 percent range since then, according to data by the Bank of Korea (BOK).
The value of debt usually grows in tandem with the economic growth, but the debt growth was much steeper than a yearly average growth rate of around 6 percent for Korea's disposable income, if roughly compared.
Korea's ratio of household debt to disposable income stood at 163 percent as of end-2011, up from 158 percent at the end of 2010, staying among the highest-ranking group in the globe.
Mindful of risks from such debt, the government has pushed banks to mend their lending practices and unveiled a set of measures to curb excessive growth of household debt.
The country's economic policymakers have said that household debt is a "manageable" problem, presenting a low chance of sprawling into systemic risks.
"There is a slim possibility that household debt will evolve into risks enough to hurt the financial system. Local financial firms have the capacity to cope with it," Finance Minister Bahk Jae-wan said at a forum held in September.
But many experts are sounding alarm bells for household debt, saying that Korea will face tougher setbacks in its debt-servicing capacity as the local economy may enter a phase of low growth and there are no signs that a revival in the property market will take place in the near future.
Buying properties or houses had been largely deemed in South Korea as the main way to augment one's assets due to prospects for rising home prices. But this belief may not further hold true, given the slumping property market and possible weakening demand for bigger houses due to population aging, analysts say.
"There may be little chance that Korea would face a property market-driven crisis like the U.S. subprime turmoil," said Lee Sung-kwon, a senior economist at Shinhan Investment Corp.
"But policymakers should not slacken their watch on the problem of household debt as it has already crimped domestic demand, sapping the economic growth."
South Korea has undergone the period of falling housing prices four times since 1990 due mainly to sharp economic shocks like the 1997-98 Asian-wide financial crisis, but compared with other major economies, the depth of home price falls in Korea was considerably small, the BOK said in its financial stability report in 2011.
But as signs that may herald the long-term slump in the property market, housing transactions remained sluggish for now as Koreans are delaying home-buying and some households who excessively borrowed mortgage lending are facing risks of default on a drop in the value of collateral.
Households' debt-serving capacity also remains squeezed as the Korean economy is losing steam on weaker exports and sluggish domestic demand. The BOK said the full-year growth is likely to reach 2.4 percent for this year and domestic demand is expected to grow a mere 1.7 percent.
Frederic Neumann, the co-head of Asian Economic Research for the HSBC, said last week that Korea's household debt problems will serve as "high growth risks, not financial risks," as such high indebtedness crimps capacity to pull off leverage for growth when exports are weak.
Analysts called for more sustained and systematic remedies for household debt, but they remained cautious about the government's money injection in coping with problems of the so-called "house poor."
There is no clear-cut definition for the house poor, but the newly minted term largely refers to borrowers who had heavily taken out mortgage lending during the housing boom, but now face severe repayment burdens due to price falls.
Recently, some local banks have allowed troubled mortgage borrowers to entrust their properties to lenders and pay a rental instead of repaying the debt until the debtor's financial status gets back.
Some are urging the government to step in by spending taxpayers' money due to concerns that a pile-up in mortgage defaults may send home prices dropping further, aggravating the household debt problem.
But many experts are opposed to such an intervention as it could set a bad precedent that the government will always be ready to solve any problems.
"The house poor are home-owners. Given that they are not in the low-income bracket, the government's potential supports could be against the principle of fairness," said Shin Suk-ha, a research fellow at the Korea Development Institute.
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