hankyoreh

 According to KB Kookmin Bank and RealEstate114, a real estate big data platform, the cost of an apartment in Korea has recently exceeded an average of 20 million won (US$17,132) per 3.3 square meters (35.52 square feet). A realtor’s office in Seoul is pictured. (Yonhap News)

South Korea’s recent rate of increase in household debt ranked third highest among 43 major economies, a report shows.

The Bank of Korea (BOK) attributed this less to negative impacts on the economic growth rate from a rise in the key interest rate and more to positive effects associated with reduced financial imbalances.

According to a BOK monetary and credit policy report submitted to the National Assembly on Thursday, South Korea’s ratio of household debt to gross domestic product (GDP) was 105% as of the first quarter of 2021, making it sixth highest among the 43 countries (as of Q4 2020) examined by the Bank for International Settlements.

Countries with higher debt-to-GDP ratios than South Korea were Switzerland (132.7%), Australia (123.5%), Norway (114.9%), Canada (112.2%), and Denmark (111.9%).

The average household debt ratio for the 42 countries besides South Korea was 61.1%.

In terms of the rate of increase in household debt, South Korea ranked third among the major economies examined.

Between 2019 and Q1 2021, South Korea’s household debt-to-GDP rose by 13.2 percentage points, the highest rate of increase after Hong Kong (18.5 percentage points) and Norway (15.3).

This indicates a growing risk of financial imbalance associated with the skyrocketing of household debt amid overheated conditions in asset markets such as stock trading and real estate transactions. The concern is that an excessive rise in asset prices associated with a major increase in liabilities could lead to uncertainty in financial markets and a contraction of the real economy.

The BOK estimates that the likelihood of a financial crisis increases by one to three percentage points with each percentage-point rise in the household debt ratio.

According to the BOK’s analysis, a hike in the key interest rate would weaken economic growth but would have an even greater effect in terms of reducing financial imbalances and contributing to economic stability.

Analysis of past cases showed that a 0.25-percentage point increase in the key interest rate was associated with a decline of roughly 0.1 percentage points in the economic growth rate and 0.04 percentage points in the inflation rate during the first year. In contrast, it was associated with respective declines of 0.4 and 0.25 percentage points in the rates of increase for the household debt ratio and housing prices.

The BOK predicted that during the early stages of an economic recovery like the current one, the growth and price effects of an interest rate hike would be smaller than the average in past years.

According to this analysis, economic actors tend to increase their consumption and investment amid hopes for an improved real economy, which stands to offset some of the effects of tight monetary policy.

The BOK also predicted that the administration’s ongoing expansionary approach to fiscal management would contribute to reducing the negative impact on growth from a higher interest rate.

By Han Gwang-deok, finance correspondent

Please direct comments or questions to [english@hani.co.kr]