Korea’s household credit climbs to record high in Q3 on increased mortgage loans

[Photo by Yonhap]

[Photo by Yonhap]

South Korea’s household credit rose to a record high in the third quarter as more individuals received loans to buy homes amid the high interest rate environment, data showed Tuesday.

According to data from the Bank of Korea, outstanding household credit, which includes household loans and credit card debt, stood at 1,875.6 trillion won ($1.46 trillion) in the third quarter, up 14.3 trillion won from the previous quarter.

The figure surpassed the previous record of 1,871.1 trillion won in the third quarter of 2022.

The sharp surge in household credit comes as more individuals sought mortgage loans.

Despite the high interest rate environment, expectations of a recovery in the real estate market increased, leading to a surge of 17.3 trillion won in mortgage loans in the third quarter. The outstanding balance of home-backed loans reached a record high of 1,049.1 trillion won.

“Despite the decline in credit loans in the third quarter, mortgage loans increased along with the recovery of the housing market and sales credit returned to growth for the first time in three quarters, resulting in an increase in overall household credit,” said Seo Jung-seok, an official from the BOK.

Earlier this year, household debt fell in the fourth quarter of 2022 and the first quarter of 2023 amid the interest rate hike shock.

Household debt, however, began to soar as financial authorities instructed banks not to raise lending rates to ease the burden on low-income households and vulnerable groups.

In January, the Korea Housing-Finance Corp. launched a policy financial product that allows individuals to borrow up to 500 million won against a home worth up to 900 million won, regardless of income. Financial authorities later announced plans to strengthen regulations on the debt service ratio (DSR) to curb debt.

“Young people are more willing to pay high interest rates out of fear that they may not be able to buy a house in the future,” said Lee Yoon-soo, a professor at Sogang University. “There is a need for a sophisticated policy combination to prevent the excessive spread of the sentiment of rising house prices.

Concerns, in the meantime, also rise as loans to small business owners and corporations surge.

According to an analysis of Bank for International Settlements (BIS) data by Maeil Business Newspaper, debt held by small business owners hit a record high of 392 trillion won at the end of 2022. The figure stood at 353 trillion won in the first quarter of this year.

Corporate loans are also worrisome.

According to BOK data obtained by Representative Yang Kyung-sook of the Democratic Party, the balance of corporate loans in the second quarter reached a record high of 1,262 trillion won. The delinquency rate soared to the highest level of 0.37 percent in more than two years.

Experts noted that urgent measures are needed to address household debt.

“While DSR regulations are in place to ensure that annual loan principal repayments do not exceed 40 percent of annual income, such regulations do not apply to jeonse loans, or loans for long-term housing rental deposits,” said Seok Byoung-hoon, a professor at Ewha Womans University. “A gradual application of DSR regulations to jeonse loans is necessary.”

By Kim Jung-hwan, Han Sang-heon, and Yoon Yeon-hae

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]

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