This paper seeks to find ways to address the household debt problem in Korea by analyzing the soundness of households and their risk of insolvency. The ratio of household debt to nominal GDP in Korea rose from 72.9% in 2003 to 91.1% in 2012. Simultaneously, the ratio of household debt to disposable income rose from 126.5% to 163.8%. At the end of 2011, the ratio of household debt to nominal GDP was 89.2%, above the OECD average of 74.5%, while the ratio of household debt to disposable income was 163.7%, exceeding the OECD average of 136.5%.
In December 2012, 54.6% of all mortgage loans in Korea were variable-rate, which was a very high percentage compared to major developed countries (at the end of 2009, the corresponding percentages for the U.S., France, and Germany were 10%, 13%, and 10%, respectively). While long-term mortgage loans usually run 20 to 30 years in developed countries, Korea had, as of September 2012, a higher percentage of loans with shorter maturities: 41.1% of loans running less than 10 years and 27.7% running three years or less. At 33.7% (at end of September 2012), the share of bullet payment loans was still high compared to the U.S. (9.7% at end of 2011) and the EU (7.5% at end of 2009). A sharp rise in mortgage loan interest rates or an economic downturn can increase the pressure on borrowers to repay the principal on their loans, in turn triggering a rise in nonperforming loans. For this reason, the household debt structure in Korea is vulnerable to change in economic conditions. It was found that the ratio of household debt to disposable income of the lowest one percentile income group rose from 4.9 times their annual disposable income in 2010 to 6.5 times in 2011, indicating the great challenge they face in repaying their household debt. Also, the delinquency rate of those with annual income not exceeding 20 million won was higher than for other income groups. The weak debt service ability of low-income groups suggests a high risk that their debts will become nonperforming.
As of December 2012, the ratio of nonperforming household debts across all financial sectors stood at 1.31%, exceeding the 1.00% level of December 2008. The ratio of nonperforming household debts in the banking sector was 0.69% in December 2012, exceeding the 0.53% in December 2008. The ratio in the non-banking sector excluding insurers and specialized credit finance institutions was also higher than the December 2008 level. Also, 98.9% of the low credit rating borrowers and borrowers with multiple debts, including, especially, mortgage loans, have high interest rate loans with non-bank lenders. Without improvement in their income, they will likely become insolvent. As of September 2012, about 230,000 borrowers with a credit rating of 7 or lower and borrowers with multiple debts (4.1% of all mortgage loan borrowers) owed a total of 25.6 trillion won in mortgage loans (4.8% of all mortgage loans). The lack of an established pension system for older workers increases the possibility of household insolvency among people 50 years of age or older should their income fall due to early retirement. As of September 2012, there were around 90,000 low credit rating borrowers and multiple debt borrowers 50 years of age or older, and their total mortgage debt was 11.1 trillion won.
Lending by the non-banking sector has recently increased, and the ratio of nonperforming mortgage loans in this sector in December 2012 was found to be higher than during the global financial crisis of 2008. The ratio of nonperforming loans held by savings banks rose by 4.77%p from 3.95% in December 2008 to 8.72% in December 2012. The recent slump in the housing market has caused more multiple debt borrowers with housing loans to become delinquent on their loans. If a large number of homes owned by them are foreclosed and auctioned off, housing prices could fall significantly, and this would have serious repercussions for the financial system at large.
Given that a sharp rise in interest rates could exacerbate the risk of insolvency since adjustable rate loans constitute the bulk of household debt, it is necessary to encourage debtors to convert their adjustable rate loans and bullet payment loans into fixed-rate loans and amortization loans. It is also advised to expand the personal debt adjustment program and the preliminary debt adjustment program, and to operate the National Happiness Fund efficiently. Should housing prices fall, the financial regulatory authorities must compel financial institutions to tighten their risk management and reduce the volume of loans outstanding by having borrowers pay back part of their principal. The government must improve the effectiveness of the various measures taken to rescue homeowners whose house values have plunged nearly to the point rendering them insolvent (debt adjustment through the Korea Asset Management Corporation (KAMCO), sale of mortgage bonds, rental housing REITs, advance subscription to reverse mortgage). The financial regulator must also step up management and supervision of household debts held by non-bank lenders to keep nonperformance of these loans at manageable levels when economic conditions worsen at home and abroad as they did, for example, during the global financial crisis. Submission of an evaluation report on household debts at least twice a year by the Administration to the National Assembly should provide early warnings.
A fundamental resolution of the household debt problem requires balanced measures to increase real household income, which in turn demands new jobs and payment of adequate wages considering the productivity and corporate financial structure. Creating new jobs requires increasing the value of economic activities by actively fostering high-growth industries and raising the competitiveness of the service sector and small- and medium-sized enterprises. More jobs can be shared by the adoption of a peak wage system in the manufacturing sector, and the career change program for mature workers can be further improved. Finally, a comprehensive financial support system must be established to extend financial services to low-income earners who are unserved or underserved by financial institutions and to provide support by means of policy and at each stage of establishment of the system.
In December 2012, 54.6% of all mortgage loans in Korea were variable-rate, which was a very high percentage compared to major developed countries (at the end of 2009, the corresponding percentages for the U.S., France, and Germany were 10%, 13%, and 10%, respectively). While long-term mortgage loans usually run 20 to 30 years in developed countries, Korea had, as of September 2012, a higher percentage of loans with shorter maturities: 41.1% of loans running less than 10 years and 27.7% running three years or less. At 33.7% (at end of September 2012), the share of bullet payment loans was still high compared to the U.S. (9.7% at end of 2011) and the EU (7.5% at end of 2009). A sharp rise in mortgage loan interest rates or an economic downturn can increase the pressure on borrowers to repay the principal on their loans, in turn triggering a rise in nonperforming loans. For this reason, the household debt structure in Korea is vulnerable to change in economic conditions. It was found that the ratio of household debt to disposable income of the lowest one percentile income group rose from 4.9 times their annual disposable income in 2010 to 6.5 times in 2011, indicating the great challenge they face in repaying their household debt. Also, the delinquency rate of those with annual income not exceeding 20 million won was higher than for other income groups. The weak debt service ability of low-income groups suggests a high risk that their debts will become nonperforming.
As of December 2012, the ratio of nonperforming household debts across all financial sectors stood at 1.31%, exceeding the 1.00% level of December 2008. The ratio of nonperforming household debts in the banking sector was 0.69% in December 2012, exceeding the 0.53% in December 2008. The ratio in the non-banking sector excluding insurers and specialized credit finance institutions was also higher than the December 2008 level. Also, 98.9% of the low credit rating borrowers and borrowers with multiple debts, including, especially, mortgage loans, have high interest rate loans with non-bank lenders. Without improvement in their income, they will likely become insolvent. As of September 2012, about 230,000 borrowers with a credit rating of 7 or lower and borrowers with multiple debts (4.1% of all mortgage loan borrowers) owed a total of 25.6 trillion won in mortgage loans (4.8% of all mortgage loans). The lack of an established pension system for older workers increases the possibility of household insolvency among people 50 years of age or older should their income fall due to early retirement. As of September 2012, there were around 90,000 low credit rating borrowers and multiple debt borrowers 50 years of age or older, and their total mortgage debt was 11.1 trillion won.
Lending by the non-banking sector has recently increased, and the ratio of nonperforming mortgage loans in this sector in December 2012 was found to be higher than during the global financial crisis of 2008. The ratio of nonperforming loans held by savings banks rose by 4.77%p from 3.95% in December 2008 to 8.72% in December 2012. The recent slump in the housing market has caused more multiple debt borrowers with housing loans to become delinquent on their loans. If a large number of homes owned by them are foreclosed and auctioned off, housing prices could fall significantly, and this would have serious repercussions for the financial system at large.
Given that a sharp rise in interest rates could exacerbate the risk of insolvency since adjustable rate loans constitute the bulk of household debt, it is necessary to encourage debtors to convert their adjustable rate loans and bullet payment loans into fixed-rate loans and amortization loans. It is also advised to expand the personal debt adjustment program and the preliminary debt adjustment program, and to operate the National Happiness Fund efficiently. Should housing prices fall, the financial regulatory authorities must compel financial institutions to tighten their risk management and reduce the volume of loans outstanding by having borrowers pay back part of their principal. The government must improve the effectiveness of the various measures taken to rescue homeowners whose house values have plunged nearly to the point rendering them insolvent (debt adjustment through the Korea Asset Management Corporation (KAMCO), sale of mortgage bonds, rental housing REITs, advance subscription to reverse mortgage). The financial regulator must also step up management and supervision of household debts held by non-bank lenders to keep nonperformance of these loans at manageable levels when economic conditions worsen at home and abroad as they did, for example, during the global financial crisis. Submission of an evaluation report on household debts at least twice a year by the Administration to the National Assembly should provide early warnings.
A fundamental resolution of the household debt problem requires balanced measures to increase real household income, which in turn demands new jobs and payment of adequate wages considering the productivity and corporate financial structure. Creating new jobs requires increasing the value of economic activities by actively fostering high-growth industries and raising the competitiveness of the service sector and small- and medium-sized enterprises. More jobs can be shared by the adoption of a peak wage system in the manufacturing sector, and the career change program for mature workers can be further improved. Finally, a comprehensive financial support system must be established to extend financial services to low-income earners who are unserved or underserved by financial institutions and to provide support by means of policy and at each stage of establishment of the system.
Shin Dongjin