Household Loans Surge in South Korea for Sixth Month, Growth Slows

Jessica Huang Friday, October 11, 2024

By Jessica Huang

In September, household loans in South Korea continued their upward trend for the sixth consecutive month, primarily driven by a surge in mortgage borrowing, according to data released by the Bank of Korea (BoK) on Friday. The outstanding household loans reached 1,135.7 trillion won (approximately US$841 billion), marking an increase of 5.7 trillion won from August. While this growth indicates sustained demand for credit, the expansion rate has notably slowed compared to August’s 9.2 trillion won surge, the highest monthly increase over three years. This deceleration suggests that the rapid borrowing momentum may be losing steam, potentially reflecting growing consumer concerns about rising debt levels and economic uncertainties.

The substantial surge in home-backed loans, a.k.a. mortgages amounting to 896.8 trillion won in September, highlights the ongoing challenge of soaring real estate prices, particularly in the Seoul metropolitan area. Policymakers have voiced concerns about the central bank’s management of the housing market, attributing the sharp rise in mortgages to uncontrolled property price inflation. Despite the BoK maintaining high borrowing costs since its last interest rate hike in February 2023, the persistent reliance on debt for home purchases raises doubts about the long-term sustainability of household finances. Also, the sustained demand for mortgages, irrespective of high interest rates, may suggest that many households are pushing their financial limits, increasing their exposure to economic shocks or further rate hikes.

Contrary to the growth in household and corporate loans, unsecured loans experienced a modest decrease of 0.5 trillion won, dropping to 237.9 trillion won in September. This decline may indicate a cautious shift among consumers away from more speculative or non-essential borrowing, which could be a positive indication of financial prudence. However, the overall increase in corporate loans, which grew by 4.3 trillion won to reach 1,316.2 trillion won, albeit slower than the previous month’s 7.2 trillion won increase, suggests that businesses continue to rely heavily on bank financing. This trend may reflect persistent economic challenges, such as the necessity for liquidity to navigate high interest rates, uncertain market conditions, and the need for investment to drive growth.

Even with elevated borrowing costs, the persistent rise in household and corporate debt highlights underlying structural problems within South Korea’s economy. The significant reliance on debt to maintain consumption and investment could present substantial risks, significantly if economic growth slows down or interest rates continue to climb. The central bank’s cautious approach to adjusting interest rates might not be enough to control the growing debt levels, potentially leading to heightened financial instability. As South Korea confronts these challenges, policymakers must address the root causes of rising debt and implement measures that promote sustainable economic growth without exacerbating financial vulnerabilities.

On the other hand, in September, household loans from all financial institutions, including savings banks and insurance firms, increased by 5.2 trillion won, marking a noticeable slowdown compared to the 9.7 trillion won increase in August, as the Financial Supervisory Service (FSS) reported. While lending continues to grow, the significant decrease in the pace raises concerns about the overall sustainability of the country’s financial well-being. The deceleration in loan expansion suggests that the initial surge in borrowing, especially in mortgages, may be losing steam. However, despite high interest rates, the consistent increase in loans indicates enduring demand, which may be fueled by skyrocketing housing costs rather than reflective of a robust economy.

In the preceding month, home-backed loans experienced a significant increase of 6.9 trillion won, highlighting the mounting pressure from escalating real estate prices, particularly in pivotal urban areas. Although mortgage growth remains robust, other loan categories decreased by 1.7 trillion won, signaling a retreat in unsecured or non-home-related borrowing. This downturn may reflect heightened consumer wariness, driven by high interest rates and economic instability concerns. Nevertheless, the persistent expansion of mortgages raises apprehensions about excessive reliance on housing market debt, prompting worries about the long-term financial well-being of households and the potential for a broader economic decline should property values decrease, or interest rates climb further.

Reprinted with permission of IndraStra Global

https://creativecommons.org/licenses/by/4.0/


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