S. Korea’s soar­ing house­hold debt chok­ing the pop­u­la­tion

The China Post - - COMMENTARY -

It is un­wel­come news for many in­debted house­holds in South Korea that mort­gage in­ter­est rates have been ris­ing re­cently. The in­crease in the in­ter­est rates for home-backed loans ex­tended by ma­jor banks has ranged from 0.23 per­cent to 0.68 per­cent over the past month.

This trend is ex­pected to con­tinue for the com­ing months, with the U.S. Fed­eral Re­serve set to raise rates in the sec­ond half of this year.

House­hold debt soared to an all- time high of 1,099 tril­lion won ( US$992.1 bil­lion) as of end March, up 11.6 tril­lion won from the end of last year, ac­cord­ing to data com­piled by the Bank of Korea. It is nat­u­ral that calls are ris­ing for the gov­ern­ment to step up ef­forts to slow the growth of house­hold debt.

‘The bal­loon­ing debt’

Be­fore in­ter­est rates rise fur­ther, house­hold debt needs to be man­aged at a proper level to avoid a credit cri­sis be­ing trig­gered. The bal­loon­ing debt will also make it dif­fi­cult to in­crease con­sumer spend­ing to help re­vive the econ­omy as Korea’s ex­ports re­main slug­gish due to fal­ter­ing global de­mand and a weak Ja­panese yen.

The Min­istry of Strat­egy and Fi­nance is likely to re­vise down its growth fore­cast for this year by 0.5 per­cent­age point to 3.3 per­cent later this month. This down­graded out­look will still be higher than fore­casts by other eco­nomic in­sti­tutes.

Ear­lier last month, the staterun Korea Devel­op­ment In­sti­tute slashed its 2015 growth pro­jec­tion to 3 per­cent from 3.5 per­cent and the Bank of Korea cut its fore­cast to 3.1 per­cent from 3.4 per­cent. Many pri­vate-sec­tor think tanks are pre­dict­ing the econ­omy will ex­pand at be­low 3 per­cent.

The Bank of Korea needs to take a cau­tious ap­proach to ad­di­tional rate cuts. When it de­cided to freeze its key rate at 1.75 per­cent last month, the cen­tral bank’s mon­e­tary pol­icy com­mit­tee noted that house­hold lend­ing by banks had in­creased “at a level sub­stan­tially ex­ceed­ing that of re­cent years.”

Dif­fer­en­ti­ated ap­proaches are needed now to re­duce the risk of house­hold debt over a long term. It may be un­nec­es­sary to tighten reg­u­la­tions on loans to mid­dlein­come earn­ers seek­ing to buy a home. But the gov­ern­ment should not push banks to lower hur­dles for lend­ing money to low-in­come peo­ple. Sup­port for them needs to be cov­ered by fis­cal means. The ed­i­to­rial is pub­lished by The Korea Her­ald on June, 2nd.

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