Snowballing Household Debt May Stunt Recovery

By Yoon Ja-young Staff Reporter Household debt is increasing at an alarming pace. When coupled with an interest rate hike, it is likely to be the biggest obstacle to an economic recovery. According to the Bank of Korea, the balance of household debt stood at 697.7 trillion won as of June, up 14.1 trillion won from the first quarter. It was the largest amount of household debt in Korea's history. When considering the increase in July, the household debt is expected to have surpassed 700 trillion won. It means household debt grew 7.5 percent in the first half of the year, despite a 3.4 percent contraction of the economy. It also contrasts with other countries, where people slashed debt and increased saving to survive the global financial crisis. Korean households, once famous for their high savings rate, are 41.8 million won in debt on average, up 840,000 won from the first quarter. Behind the increase were snowballing mortgages, which grew by 13 trillion won. Koreans, who saw apartment prices hike a number of times, are buying houses on hundreds of millions of won in mortgages. The government's deregulation in the real estate transaction, coupled with huge liquidity, encouraged people to get mortgages. However, analysts warn that the fast growing household debt could result in disaster when coupled with an interest rate hike. "The rising household debt coupled with an interest rate hike could collapse households as well as the financial industry," said Jeong Young-sik, a senior researcher at Samsung Economic Research Institute. "If the increasing household debt affects assets and triggers overconsumption, it could lead to the collapse of a bubble similar to the one seen during the credit card crisis for the mid and long term. It could end in household bankruptcy," he added. Talks of an interest rate hike as an exit strategy, meanwhile, are growing. "Many Koreans are also increasingly worried about the state of their debt levels, despite record low borrowing costs," said Alaistair Chan, associate economist at Moody's Economy.com. In that case, interest burden would weigh on households. Currently, interest rate on mortgages stands at between 6 to near 9 percent. The CD rate, which is the key for the mortgage rate, rose from 2.41 percent early this month to 2.52 percent this week. Strategy and Finance Minister Yoon Jeung-hyun, meanwhile, was positive that the economy could record the minus 1.5 percent growth target this year. "The economic growth would be smaller in the third quarter, but it would continue growing in the latter half of the year. The minus 1.5 percent annual growth target could be attained," he said. The minister expected the economy to recover its 4 percent growth rate next year, due to the global economic recovery and the positive domestic economy. He said the exit strategy will be executed step by step, depending on economic recovery. chizpizza@koreatimes.co.kr