SEJONG -- In 2013, South Korea saw its collective outstanding loans plus credit-based payment services extended to the household sector top 1,000 trillion won ($842 billion) for the first time in history.

The mounting household debt was somewhat attributable to eased lending regulations on the debt-to-income ratio in 2012 during the Lee Myung-bak administration.

The Park Geun-hye administration further pushed for double-track deregulation, under which the loan-to-value ratio as well as the debt-to-income ratio were eased for borrowers.

The 2014 deregulation was mostly targeted at boosting the economy by inducing as many households as possible to purchase apartments via mortgages on relaxed lending terms.

Aside from the financial authority, the Bank of Korea played a significant role in the Park administration accomplishing the stimulus policy. The BOK’s Monetary Policy Committee cut the benchmark interest rate by 125 basis points in only two years.

The benchmark rate, which reached 2.5 percent per annum in July 2014 was slashed to 1.25 percent in June 2016 via five incremental cuts during the period.
 

Eased rules and record-low rates were regarded as a historic opportunity for all -- ordinary households, houseless households and multiple-home owners. They rushed to commercial banks for taking out mortgages and gathered at real estate agents, particularly in the Seoul metropolitan area.

As a result, the nation’s outstanding household debt surged by 500 trillion won, compared to the balance in 2014, to exceed 1,500 trillion won at the end of 2018. It is estimated to have further increase to top 1,600 trillion won at the end of 2019 while the official figure has yet to be made public.

On the basis of the latest figure, the household debt doubled (a 102.5 percent growth) in a decade -- from 776 trillion won at the end of 2009 to 1,572 trillion won as of September 2019.

This data indicates that the Moon Jae-in administration, which took office in May 2017, has de facto failed to put the brakes on mounting debt.

A series of real estate polices -- nominally aimed at curbing apartment prices -- conducted by the Moon administration, were of no use and rather fanned speculation, under which the apartment prices in Seoul reached to an all-time high, unreasonable levels. Some apartment complexes posted about 100 percent growth in unit price for only three years.

BOK Gov. Lee Ju-yeol and some other rate-setters have kept the interest rate under 2 percent for nearly five years since March 2015.

President Moon did not replace the chief of the central bank and approved reappointment of Lee, who took office in 2014 during the Park administration, in 2018. So Lee’s another four-year term expires in March 2022.

Lee had clarified that the reappointment could “mean that the BOK has been acknowledged (by the new administration) over its independency and significance.”

Financial market insiders assess that Lee and the BOK has appeared to be putting more focus on the necessity of backing up the stable economic growth via monetary easing, rather than hindering further increase in consumer loans.

It is irrefutable, anyway, that the huge sum of outstanding household loans, involving mortgages, has been a core factor restricting consumption in the household sector and ultimately hampering macroeconomic growth.

Despite the spike in some complexes’ prices, ordinary households -- owning only one apartment unit and indebted to commercial banks -- inevitably have their ability to spend restricted due to debt repayment burdens, unless they choose to realize capital gains by selling their homes and moving to cheaper areas.

Some analysts bet on the possibility that the BOK could choose to lower the key rate again from the current level of 1.25 percent per annum by 25 basis points to fresh record-low of 1 percent. Their prediction is based on the feasibly dented economy in the wake of the coronavirus from China.

The next gathering of the central bank’s Monetary Policy Committee for rate-setting is slated for Feb. 27.

South Korea had an average household debt-to-disposable income ratio of 184 percent as of 2018, which was the eighth-highest among 32 major countries. The Organization for Economic Cooperation and Development has compared the ratio of household debt to net disposable income among 32 out of its 36 members.

Korea fell behind major economies in the household financial soundness. The figures stayed at 127 percent in Portugal, 121 percent in France, 109 percent in the US, 107 percent in Japan, 70 percent in Chile and 57 percent in Slovenia.

By Kim Yon-se (kys@heraldcorp.com)