Little residential buildings and houses at dusko in Mokpo, South Korea, on Friday, August 16, 2024.
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Basically, central banks have one superior mandate: to ensure price stability and inflation control in the country. Decision -makers in South Korea must fight other responsibility: home debt management.
References to household debt often, if not always, appear in Decision on the monetary policy of the Korea Bank.
Side governor Rhee Chang Yong said in Speech on January 2 that “there was a criticism about why the Korea Bank takes into account the debt and seems too careful when making a basic rate.”
Why, then, household debt so important for the considerations of the BOK monetary policy? Short answer: it's too high. Long answer? Much more complicated.
Park Jeongwoo, economist of Nomury in South Korea and Taiwan, said CNBC that the side is concerned about the negative long -term influence of higher household debt on growth.
“BOK believes that () a higher debt burden weakened the strength of household expenses. At the same time, strong demand for apartments was caused by distorted allocation of capital in the entire economy, which led to greater allocation of capital to non -production sectors. “
Unique housing system
Two factors that contribute to a large amount of debts among households in South Korea are intensive use of credit cards and a unique system of apartments in South Korea.
Of course, future house owners can buy their own homes, but for those who cannot, they must rent.
But unlike most rental systems around the world, tenants from South Korea pay a deposit known as “Jeons” or “Key Money”, instead of a monthly rent, according to Samuel Rhee, co -founder, president and investment director, the BogicT endowus platform.
Jeonse is a deposit of around 50-80% of the market value of the property. At the end of the lease, the deposit is returned to the tenant. For the owner, Jeons is a free loan that they have the freedom of investing.
However, tenants usually take a loan to finance the deposit, which according to Rhee causes “heavy burden and excessive debt in the housing system.”
He notes that although the overall household index to GDP has not increased significantly over the past few years, the growing interest rates have increased the burden of debt service, “which was the main problem of the BOK and the Korean government.”
Rhee pointed out that although the side reduced the rates twice to take them to 3% at the end of last year, the banks did not transfer reduced interest rates to consumers.
This means that although the side has reduced the rates, the costs of interest of tenants did not drop.
“Economic disaster”
Ryota Abe, who is an economist in the Department of Global Markets and the Treasury of the Pacific at the Sumitomo Mitsui Banking Corporation, said that the index of household debt in South Korea is disturbing because it can affect the economic growth of the country, making the financial sector.
“In the case of (a), the credit crisis will take place because the borrower is not able to pay off the debt, because it is too huge, the problem will bring deflancy pressure as well as economic recession.”
Abe cited the Bank of International Oldlements, which stated that South Korean's household debt index was 91% of GDP in the second quarter of 2024. Compared to the debt of households in other advanced countries is an average of 68.9%.
For comparison, Data from the International Monetary Fund He showed that the country has the highest household appointment to GDP among Asian countries in 2023, 93.54.
China, the largest economy of Asia, had an indicator of 63.67, while in India it was 39.16. Japan had a ratio of 65.66 in 2023.
Abe also said that the debt for income for the net disposal was 186% in 2023 in South Korea, and in 2008 it will pop out of 130%.
The data show that the rate of debt growth is faster than the increase in wages and GDP, which means that the economy of South Korea, especially the household sector, depends largely on the debt, said ABE.
“In the event that the sector does not pay off the debt, negative shocks would be huge, which would not be limited in the sector, but for the financial sector. If such a shock occurs, the economy will be in a disaster. Therefore, the economy will be in a disaster. Korean authorities must reduce such a risk in advance – he added.
Book dilemma
The side will face a difficult path. He must lower the rates to stimulate the slowed economy and relieve the debt load, but the reduction of the rate would weaken the win and may increase imported inflation.
More importantly, Rhee Endowusa said that the reduction of the rate can stimulate potential demand for houses, which leads to the acceleration of overdue household debt.
“If you reduce interest rates and debt increases, which is used to stimulate housing demand, which causes an increase in house prices and rental, it is inflationary, and BOK would like to limit the inflationary impact,” said Rhee.
Alex Holmes, Asia Research Director at the Economist intelligence unit, said CNBC “Squawk Box asia“Earlier in January 2024, it was the first year in which the debt of the household fell as a percentage of GDP, and the side would not want to reduce rates too quickly to prevent reflection.
