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[Editorial] Households in mess

The average monthly income for households grew 3.5 percent year on year to 3.86 million won during the first quarter of this year. But spending grew at the faster rate of 4.7 percent. As a result of the gap, household debt has snowballed.

At the end of the first quarter, household debt surpassed the 800 trillion won mark. Loans from banks and non-banking financial institutions and purchases on credit amounted to 801.4 trillion won.

If no action is taken to bring the ballooning debt under control, it will pose a grave risk to lenders as well as borrowers. That is the apparent message from Moody’s Investors Service to the nation when it cites household debt as a grave threat to the banking industry.

Hardest hit are those who borrowed money to purchase homes in anticipation that property prices would rise. But the housing market shows few signs of coming out of a long-lasting slump. According to one survey, such homeowners in their 30s or 40s spend more than 40 percent of their disposable income on debt payment.

Another survey shows that the ratio of household debt to disposable income soared from 92 percent in 2001 to 155 percent in 2010. The debt burden will weigh even more heavily if the Bank of Korea raises its benchmark interest rate, as expected in the near future, to curb mounting inflationary pressure.

The central bank says it will take measures in favor of the “soft landing of household debt.” But the promise has yet to be backed up by action.

The financial authorities will have to make less burdensome mortgages available ― amortizing loans, a type of loan whose principal is paid down over its life, that are payable at affordable fixed rates over a long period. Action must be taken before it is too late.
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