South Korea's household debt nears $2 trillion mark amid rising interest rates

South Korea's household credit is estimated to have exceeded 2,000 trillion won in the second quarter, marking a new record. This comprehensive indicator of household debt includes loans from financial institutions and credit card purchases.

The Bank of Korea is set to release preliminary figures for the second quarter, following a first-quarter balance of 1,993.1 trillion won, already a record. Household loans from financial institutions grew by 12.9 trillion won to 1,865.8 trillion won in the quarter, while sales credit, including credit card payments, increased by 1.1 trillion won to 127.3 trillion won.

The pace of household loan growth accelerated in the second quarter, driven by a combination of housing transaction demand and stock investment funding. Data from the Financial Services Commission indicates that total financial institution household loans increased by 3.5 trillion won in April, 9.3 trillion won in May, and 8.3 trillion won in June, totaling 21.1 trillion won for the quarter. Given that the FSC's figures have a narrower scope than the Bank of Korea's household credit, the total household credit balance likely surpassed 2,000 trillion won by a significant margin.

This surge in household debt comes as the Bank of Korea begins to raise its benchmark interest rate, raising concerns about increased repayment burdens for households and potential financial sector instability. The central bank's Monetary Policy Committee raised the rate from 2.50% to 2.75% last month, with further increases anticipated soon. The combination of a massive household debt and rising interest rates could lead to an increase in defaults, particularly among vulnerable borrowers, posing a significant risk to financial stability and potentially dampening overall economic growth due to reduced consumer spending power.

While the Bank of Korea's Financial Stability Report noted that household loan delinquency rates remain below long-term averages, it also highlighted a rise in the proportion of vulnerable households with insufficient repayment capacity. The Financial Instability Index (FSI) remained in the 'caution' stage (above 12) at 16.9 in June, up from 16.0 at the end of last year. The Financial Services Commission recently stated that South Korea's household debt-to-GDP ratio remains high compared to other major economies and poses a considerable risk of stimulating the real estate market. Although the ratio, estimated at 88.6% at the end of last year, may have decreased due to nominal GDP growth, it remains relatively high compared to countries like the United States (68.1%), Japan (61.1%), the United Kingdom (73.6%), and France (59.7%).