According to the Bank of Korea, household credit has increased for eight consecutive quarters since the second quarter of 2024, rising by 111 trillion won. As of the end of the first quarter of this year, the total stood at 1993.1 trillion won, and if the current trend continues, it is likely to surpass 2000 trillion won in the second quarter. The Bank of Korea previously warned in its September 2023 Financial Stability Report that without additional policy measures, household debt could grow by 4% to 6% annually over the next three years, making the concern over reaching 2000 trillion won a reality.
President Lee Jae-myung also expressed concerns about household debt. At a press conference marking his first anniversary in office, he stated, "There is too much private debt in South Korea," warning that "it could lead to a major crisis at any moment." He added, "We are on the brink of surpassing 2000 trillion won, and even a 1 percentage point increase in interest rates could cause chaos," emphasizing that this situation distorts the economic landscape. Notably, South Korea's household debt-to-GDP ratio, at 89%, ranks sixth among the 31 OECD countries, maintaining a position in the upper tier.
Over the past year since the government took office, regulations on household loans have been significantly tightened. Financial authorities set a household loan growth target of just 1.5% for this year, lower than the previous year, and implemented measures such as reducing the proportion of policy loans, restricting the extension of mortgage loans for multiple homeowners, and conducting three-tier stress tests on DSR. However, household credit has reached an all-time high, indicating that the increase in household debt has not been curbed.
The ongoing rise in household debt is largely driven by demand for housing-related financing. The increase in home prices in Seoul and expectations of a recovery in the real estate market have spurred demand for home purchases, while refinancing of existing mortgages continues. Additionally, loans for jeonse deposits, living expenses, and policy loans are difficult to reduce under current regulations. Following a recent correction in the KOSPI, individual investors hoping for a rebound have turned to using overdraft accounts for investment, leading to a surge of over 600 billion won in the balances of personal overdraft accounts at the five major banks within just two days.
The balloon effect resulting from stricter bank regulations is also a concern. As banks raise their lending thresholds, borrowers may shift their funding needs to credit card loans, insurance contract loans, and secondary financial institutions such as savings banks and mutual finance. Recently, credit card loans reached an all-time high, and the balance of mid-interest loans has increased by 60% compared to the same period last year.
To effectively curb the rise in household debt, experts suggest that measures should go beyond simple financial regulations to also address housing finance practices and the structure of housing supply. Koo Bon-seong, a senior researcher at the Financial Research Institute, stated, "To enhance policy effectiveness, financial institutions must improve their lending practices by rigorously assessing borrowers' financial situations, funding plans, and repayment risks," and recommended that strict regulations on repayment periods be enforced to prevent excessive borrowing relative to age, while transitioning loans for multiple homeowners to development finance methods that promote new housing supply.
* This article has been translated by AI.
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