Household Debt in South Korea Surpasses 2,000 Trillion Won for First Time

South Korea's household credit balance has surpassed 2,000 trillion won for the first time, with a 25.9 trillion won increase in the second quarter, according to Bank of Korea data. This marks the largest quarterly increase since the third quarter of 2021, a period characterized by intense real estate investment fueled by borrowed money among younger generations.

The surge is primarily attributed to a 24.9 trillion won rise in household loans. Housing-related loans saw a substantial increase of 12.2 trillion won, influenced by a rise in housing transactions ahead of the expiration of a tax incentive. Even more notably, "other loans", encompassing unsecured loans, margin loans for stock trading, and loans secured by stocks or savings accounts, jumped by 12.8 trillion won. This significant increase in "other loans" is more than double the previous quarter's growth and reflects a strong trend of stock market investment using borrowed funds, known as "bitu" (borrowing to invest).

While housing loans grew, the expansion of "other loans" surpassing housing loans is an unusual development, last seen in the second quarter of 2021. The Bank of Korea anticipates that the growth in "other loans" may slow in the third quarter due to a downturn in the stock market. The data also shows shifts in lending patterns across different financial institutions, with a notable increase in loans from traditional banks after a slight decrease in the previous quarter, and continued growth from non-banking institutions and other financial entities.

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It was a period when housing transactions increased before the expiration of the heavy capital gains tax, and pre-sale collective loans increased.

Adding to concerns about the rapidly expanding household debt, the Bank of Korea has signaled further interest rate hikes. This poses a significant risk of increased debt servicing costs for vulnerable borrowers, presenting a major challenge for financial authorities in managing the stability of the financial system. The government has set a target to reduce the household debt-to-GDP ratio to below 80% by 2030, a goal that may be aided by economic growth but still leaves South Korea with a relatively high debt ratio compared to other major economies.

Recent government measures to ease loan-to-deposit ratio regulations, increasing the target for household loan growth to 3% from 1.5% for the year, are also under scrutiny. While intended to accommodate genuine housing demand, there are concerns about the potential impact of these eased regulations on further debt accumulation. Experts caution that the actual impact will depend on the pace and scale of redevelopment and reconstruction projects, which often involve lengthy approval processes.

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We need to watch at what point and on what scale it will occur, as redevelopment and reconstruction, which lead to loans for moving, do not proceed quickly but go through a lengthy process.