Korean households' ability to repay debt has dropped to a record low, with household debts continuing on an upward spiral amid falling income, spawning fears over massive insolvency.
What is of more concern is that Koreans' debt repayment capability has been on the decline, while that of people in advanced economies such as the United States and Britain has been improving.
In its latest report, the Bank of Korea (BOK) said Thursday that aggregate household debt totaled 818.4 trillion won in June, up 2 percent from 802.5 trillion won the previous quarter.
Over the same period, Koreans' nominal income shrank 2.3 percent, the third-consecutive quarter of contraction. The income decreased 2.1 percent in the first quarter of this year and 1.7 percent in the fourth quarter of last year.
As a result, individuals' debt-to-income ratio, an indicator measuring their capacity to service debts, came in at 1.43 in June, up from 1.4 last December and 1.36 in 2007.
The ratio is well above that of the United States, the epicenter of the global financial crisis. The ratio for the U.S. stood at 1.27 in June, down from 1.29 in December. Britain's was higher at 1.67, but dropped from 1.68 in December.
"Repayment capability has been weakening as more individuals have taken out mortgages while income has been falling due to the sluggish job market," BOK economist Kim Yong-sun said. The number of jobless reached 273,000 in June, up from 196,000 in March and 121,000 in December.
"The ratio is expected to further rise in the future as household debt is likely to continue to increase, led by demand for mortgages," he added.
However, the central bank discounted concerns over the massive bankruptcy of local households, saying the country's debt-to-income ratio is rising but that the quality of consumer debt itself is not that bad.
"Despite the steady increase, the likelihood of households being unable to service debt on a large scale is considered to be low," Kim said.
"The soundness of Korean mortgages is favorable compared to that of major countries, such as the U.S. and Britain, due to the much lower loan-to-value (LTV) ratios," he added.
Amid record-low borrowing costs and signs of an economic recovery, demand for mortgages rose in expectation of further gains in housing prices this year, sparking worries about a possible asset bubble.
In response, the Financial Supervisory Service toughened its regulatory controls on home loans in July and September.
(Source: The Korea Times)
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