South Korea’s monetary authorities on Thursday reiterated their warning against increasing household debt especially for the elderly as the heated real estate market continues to attract liquidity.

According to a report released by the Bank of Korea, the outstanding household debt, including credit spending, came to 1,572.7 trillion won ($1.35 trillion) as of end-September.

The figure, which has gained 3.9 percent on-year, marks the lowest growth since the second quarter of 2004, when the household debt inched up 2.7 percent from the previous year. 

The average debt-to-disposable income ratio has also increased 2.9 percentage points to 160.3 percent on-year, as of the third quarter. This indicates that Korean households spend most of their income to pay back debt, excluding tax. The ratio has been steadily increasing since 2015.

But the financial stability of local households deteriorated from the previous quarter in the third quarter, the BOK noted.

“The growth of household credit has been slowing based on the nonbanking lenders’ loans,” the BOK said.

“But as the households’ debt payment burden continues to remain high, the default rate of nonbanking lenders has recently been on the rise,” it added.

The central bank warned that the growing population of elderly people due to the aging society has been contributing to signs of a deteriorating household debt soundness.

The debt-to-disposable income ratio of people aged 60 years or older came to 212.6 percent, as of the third quarter, compared with the average 164.4 percent and 182.2 percent of those in the 50s and 40s, respectively. The ratio for those in the 30s came to 189.8 percent.

The BOK expressed concerns on the stability of loans extended to the elderly, saying that they have “high leverage in income, but low capability to pay off debt which has recently led to deteriorating fiscal soundness.”

Overall borrowing by local households and companies came to 194.5 percent of the country’s nominal gross domestic product as of end of third quarter, up 8.2 percentage points on-year.

In contrast to household debt, corporate borrowing saw a huge gain of 8.5 percent on-year in the third quarter, to 1,153 trillion won.

The increase in the figures follows two consecutive base rate cuts by the central bank, in July and October, which resulted in a record low base rate of 1.25 percent.

The BOK also stressed the need to “cautiously monitor” the possible increase in investments in real estate and other high-risk assets, which could trigger a financial imbalance.

“The prolonged monetary easing and low interest rate has led to the economic stakeholders’ stronger tendency to focus on profit-making investments,” it said.

By Jung Min-kyung (mkjung@heraldcorp.com)