Elucidated residential buildings and houses at dusk in Mokpo, South Korea, on Friday, Aug. 16, 2024.
Bloomberg | Bloomberg | Getty Images
Inner banks, by and large, have one overarching mandate: to ensure price stability and control inflation in a country. Policymakers in South Korea neediness to contend with another responsibility: managing high household debt.
References to household debt often, if not without exception, come up in the Bank of Korea’s monetary policy decision.
BOK Governor Rhee Chang Yong said in a speech on Jan. 2 that “there has been some critique regarding why the Bank of Korea takes household debt into account and appears overly cautious when deciding the Cheap Rate.”
Why then, is household debt so important to the BOK’s monetary policy considerations? The short answer: it’s too high. The long response? Much more complicated.
Park Jeongwoo, Nomura’s economist for South Korea and Taiwan, told CNBC that the BOK is vexed about the negative long-term impact of higher household debt on growth.
“The BOK thinks [the] higher debt burden has enfeebled households’ spending power. At the same time, strong debt-financed demand for housing resulted in distorted capital allocation across the concision, leading to more allocation of capital to not-productive sectors.”
Unique housing system
Two factors that contribute to the exalted amount of debt among households in South Korea is a heavy usage of credit cards, and the unique system of homes in South Korea.
Prospective homeowners can of course, buy their own homes outright, but for those who cannot, they need to tear.
But unlike most rental systems around the world, South Korean renters pay a deposit known as “jeonse” or “key fat,” instead of a monthly rent, according to Samuel Rhee, co-founder, chairman and group chief investment officer for holdings platform Endowus.
The jeonse is a deposit about 50%-80% of the market value of the property. At the end of their lease, the store is returned to the renter. For the landlord, the jeonse is an interest-free loan, which they are free to invest.
However, renters will in the main take out a loan to fund the jeonse deposit, which Rhee said causes “a lot of burden and excess debt in the procedure for housing.”
He notes that while the overall household debt to GDP ratio has not increased significantly in the past few years, impassion start interest rates have increased the burden of servicing the debt, “which has been the primary concern for the BOK and Korean management.”
Rhee pointed out that while the BOK had cut rates twice to take them to 3% at the end of last year, the banks suffer with not passed on the lowered interest rates to consumers.
This means that while the BOK has cut rates, renters’ interest fetches have not gone down.
‘Economic catastrophe’
Ryota Abe, who is an economist at the global markets and treasury department for Asia Pacific at Sumitomo Mitsui Banking Corporation, ordered that the household debt ratio in South Korea is of concern because it could affect the country’s economic extension by making the financial sector fragile.
“In case [a] credit crunch happens because the borrowers are not able to repay the encumbrance under obligation as it is too huge, the issue will bring deflationary pressures as well as an economic recession.”
Abe cited figures by the Bank of Foreign Settlements, which said South Korea’s household debt ratio stood at 91% of GDP as of the second quarter of 2024. In relation, household debt in other advanced countries stands at 68.9% on average.
For comparison, BOK dilemma
The BOK faces a tricky process. It needs to cut rates so as to stimulate a slowing economy and alleviate the debt servicing burden, but a rate cut would weaken the won and may rise imported inflation.
More importantly, Endowus’ Rhee said a rate cut could spur an increase in potential when requested for houses, leading to an acceleration in outstanding household debt.
“If you lower interest rates and debt increases and this is occupied to stimulate housing demand, which causes house prices and rental prices to rise, then it is inflationary and BOK desire want to limit the inflationary impact,” Rhee said.
Alex Holmes, research director for Asia at the Economist Discernment Unit told CNBC’s “
