Steep, quick jump in household loans prompts concern about debt explosion in Korea

Posted on : 2024-07-08 17:09 KST Modified on : 2024-07-08 17:09 KST
Over the course of just four working days in July, household loans have risen by around 40% of the entire June increase
A sign about home loan interest rates hangs on a commercial bank in Seoul in June. (Yonhap)
A sign about home loan interest rates hangs on a commercial bank in Seoul in June. (Yonhap)

Alarm bells are ringing for Korea’s market for real estate and other assets, along with household loan conditions. With household loans at the country’s major commercial banks skyrocketing by more than 2 trillion won in the space of just four days this month, excessive debt is reemerging as a potential threat to the nation’s economy. Analysts are suggesting the administration has only fueled the troubled market situation with its inconsistent policies.

According to accounts Sunday from financial world sources, the household loan balance for five major banks — KB Kookmin, Shinhan, Hana, Woori, and NH (Nonghyup) — stood at 710.76 trillion won as of Thursday, or a full 2.18 trillion more than in the month of June.

This means that over the course of just four working days in July, household loans have risen by around 40% of the entire June increase of 5.34 trillion won.

The scale of the household loan increase for the five banks in June was the largest in the two years and 11 months since July 2021, when the total reached 6.20 trillion won. This month has shown an even faster rate of increase than the rises of 4 trillion to 5 trillion won a month observed since April.

“Late June is typically the deadline for assessing bank employee performance in terms of things like loan product sales, so it’s unusual to see so many loans occurring in early July,” said an official at one commercial bank.

By loan type, mortgages were up by 838.7 billion won and credit loans by 1.09 trillion won. In particular, a strong rebound has been observed in July for credit loans, which fell by 214.3 billion won last month.

One trend driving the recent rise in household loans has involved people taking out loans to invest in real estate and other asset markets.

“As housing prices in popular parts of Seoul have begun matching their previous historic highs and interest rates for mortgages have fallen to the upper 2% range, this has led people to take out loans to acquire their own homes,” explained an official from the banking world.

According to the Korea Real Estate Board, Seoul apartment prices were up for a 15th straight week as of early July, with the highest rate of increase (0.20%) in two years and nine months.

Another factor apparently contributing to the explosive increase in credit loans is a rise in the number of people taking on debt to invest in Korean and overseas stocks amid a day trading wave on the public offering market. Some have been setting up “minus bankbooks” with banks to come up with the margins for shares in prospects like the gaming company Shift Up, which kicked off its initial public offering subscription earlier this month.

The Yoon Suk-yeol administration’s inconsistent policies are also coming under fire. Observers are accusing it of moving too slowly to rein in bank loans after days of presenting policy measures stoking housing demand, including an increase in the supply of policy loans (including special loans for those with newborn children), delays in the intensification of regulations on household loan ceilings (stress debt service ratio phase 2), and a push to reduce the comprehensive real estate tax.

According to the Ministry of Land, Infrastructure and Transport, a total of 5.86 trillion won in requests had been received as of June 21 for special loans for households with newborns, which opened on Jan. 29. Of this amount, 75.2% (4.405 trillion won) was for new home purchases.

Amid these developments, the administration has been closely considering including existing blind spots such as key money loans, intermediate payment and relocation cost loans, and policy loans in its debt service ratio (DSR) regulations, which are meant to keep the burden of debt repayment relative to household income below a certain level.

“This year, the administration has encouraged policy financing with measures like the supply of 27 trillion won toward special loans for households with newborns, while postponing its planned reinforcements of regulations on loans,” explained Hanyang University economics professor Ha Joon-kyung.

“There’s a strong chance that the market will take this as a signal that it means to free up finances to shore up the real estate market,” he added.

“The important thing is to consistently introduce financial regulations, including reductions to blind spots in the existing DSR regulations,” he stressed.

By Park Jong-o, staff reporter

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

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