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[Editorial] Ballooning household debt

Policymakers must tighten loan conditions amid signs of recovery in property market

By Korea Herald

Published : Aug. 28, 2023 - 05:30

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South Korea’s growth momentum is weakening. The real income of households is dropping, even as their debt is mounting. The economic debacle of China, which is the country’s biggest trading partner, is deepening.

Although both the nation’s internal and external economic situations face more and more obstacles, there is one strangely upbeat sector here: the real estate market, where speculative investors sense property prices are close to hitting their bottom.

In a country where a number of people regard property investment as a key tool to increase their wealth, a long-awaited recovery in apartment prices, initiated and bolstered by the Yoon Suk Yeol administration, is deemed a signal for returning to the property investment game.

But taking on burdensome bank loans and purchasing pricey houses to resell later at a handsome profit is riskier than ever, Bank of Korea Gov. Rhee Chang-yong said in a press conference Thursday after the central bank kept its key interest rate steady at 3.5 percent.

Rhee’s warning is targeted at those who aggressively borrow money from financial institutions -- often beyond their financial capacity -- and pour the money into the real estate market.

“It is unlikely that borrowing costs will go down to 1 percent to 2 percent as seen in the past decade,” Rhee said. “Those who invest in the property market should consider whether they can handle (the borrowing costs).”

During the period when interest rates remained low, speculative homebuyers took out big loans and bought multiple homes, or pricey ones in popular districts in Seoul. They did not worry about borrowing costs, as their profits would surely be far bigger than the total cost for such speculative investments during the property market boom.

“Today’s young people have not experienced inflation,” Rhee said. “If they buy houses since they expect interest rates to decline, they must be very cautious.”

As far as the current interest rate trend is concerned, it is unlikely to shoot up in the short term, as the BOK kept the benchmark rate unchanged for the fifth time since February this year. The central bank has been standing pat after it delivered seven consecutive rate hikes from April 2022 to January 2023.

As Rhee and other experts worry, the local property market sentiment is shifting in favor of a recovery on the horizon. This is largely because the Yoon administration loosened real estate regulations and lowered related taxes in the name of boosting the slump-hit property market.

The most worrying sign is that the country’s household credit jumped in the second quarter of this year. According to the BOK, outstanding household debt came in at 1,862.8 trillion won ($1.41 trillion) at the end of June, up 9.5 trillion won from three months earlier. Mortgage loans soared by 14.1 trillion won, but other types of household loans went down by 4 trillion won over the cited period.

The increase of household loans even defied the higher borrowing costs compared with the past, resulting from multiple rate hikes from the BOK to tame inflation. The central bank also noted that eased regulations on homebuying are translating to a jump in household loans.

According to the Korea Real Estate Board, the average apartment price in Seoul has risen for a 14th straight week, marking the biggest upward pace in 21 months. Apartment prices outside of the capital also rose after having been trapped in a downward trend for 68 weeks.

In the first half, 36 percent of homebuyers in Seoul were in their 20s and 30s -- an age group whose wealth remains relatively shaky compared to older groups. Some experts are therefore concerned about their repayment capability when interest rates suddenly begin to go up.

The Yoon administration has long been focused on preventing a hard landing of the downward-trending property market. Given rising household credit and still high interest rates, financial policymakers have to tighten loan conditions and bring speculative property investment under control.