South Korea has a big problem with a long household. A unique rental system in the country may be guilty
Illuminated residential buildings and houses at dusk in Mokp, South Korea on Friday, August 16, 2024.
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Central banks, mostly, have one comprehensive mandate: ensure prices stability and control inflation in a country. Politics donors in South Korea must fight another responsibility: managing a high long household.
References to household debt often, if not always, come in Decision on the Monetary Policy of the Bank of Korea.
Said Governor Boka Rhee Chang Yong Speech 2. January This “there was a criticism of why the Korea Bank takes into account the debt of households and seems too careful when deciding the basic rate.”
Then why is the household debt so important to consider the Moetar Policy of the Hi? Short answer: It’s too high. A long answer? Much more complex.
Jeongwoo Park, an economist of Nomura for South Korea and Taiwan, told CNBC that Hi was worried about the negative long -term influence of a larger household on growth.
“Hi thinks [the] The larger debt burden has weakened the cost of households. At the same time, strong demand for housing residentially resulted in the distorted distribution of capital throughout the economy, which led to a larger capital distribution of non-produced sectors. “
Unique residential system
Two factors that contribute to a large amount of debt among households in South Korea are a great use of credit cards and a unique housing system in South Korea.
Future homeowners can, of course, buy their own homes directly, but for those who cannot, they need to rent.
But unlike most of the worldwide rental systems, South Korean renters are paid to the deposit known as “Jeons” or “Key Money”, instead of the monthly rent, according to Samuel Rhee, co -founder, chairman and chief directors for investing in ENDOW’s wealth platform.
Jeonse is a deposit of about 50% -80% of the market value of property. At the end of the lease, the deposit returns to the renters. For a renters, Jeonse is an endless loan, which I can freely invest.
However, renters will usually take a loan to financing the Jeonse deposit, which Rhee says causes “a lot of cargo and excess debt in the housing system.”
He notes that although the total ratio of household debt and GDP has not increased significantly in the last few years, growing interest rates have increased the burden of debt service, “which is the main concern for the flank and the Korean government.”
Rhee pointed out that, although he had 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 even though the side reduced the rates, the cost of interest rates did not fail.
‘Economic Disaster’
Ryota Abe, who is an economist in the global market and the Ministry of Finance for the Asian -Pacific Banking Corporation Sumitomo Mitsui, said that the ratio of households in South Korea is concerned because it could affect the economic growth of the country by making fragile financial sector.
“In case [a] Credit Crunch happens because the loans are unable to repay the debt because it is too big, the question will bring deflation pressures as well as economic recession. “
ABE quoted the figures of the bank of international settlements, which said that the debt ratio in the household of South Korea was 91% of GDP in the second quarter of 2024. For comparison, household debt in other advanced countries is an average of 68.9%.
For comparison, Data from the International Monetary Fund They showed that the country that has the highest debt ratio in household and GDP is among Asian countries in 2023, at 93.54.
China, the largest Asian economy, had a ratio of 63.67, while for India 39.16. Japan had a ratio of 65.66 in 2023.
Abe also said that the ratio of debt and net available income was 186% in 2023 in South Korea, and balloned with 130% in 2008.
Data show that the speed of increase in debt is faster than the increase in salary and GDP, which implies that the South Korean economy, especially the household sector, depends high on the rainbow, Abe said.
“In the case where the sector does not repay the debt, the negative shocks would be huge, which would not be limited in the sector, but to the financial sector. If such shock happened, the economy will be in disaster. Therefore,” Korean authorities must reduce such risks in advance “, he added.
Hi dilemma
Hi is facing a ticklish way. The rates should be reduced to stimulate the slowdown of economy and alleviate the load of debt service, but the reduction of the rate would weaken the conquered and may increase the imported inflation.
More importantly, Endowus Rhee said that a reduction of the rate could encourage an increase in potential demand for homes, which led to accelerating an outstanding debt in the household.
“If you reduce interest rates and the debt increases, and this is used to encourage demand for housing, which causes an increase in houses’ prices and rental prices, then the inflationary and Hi would like to limit the inflation influence,” Rhee said.
Alex Holmes, Director of the Asia Research on Economic Intelligence, told CNBC “Squawk Box Asia“Earlier in January, 2024 was the first year when a household debt demolished as a percentage of GDP, and Hi will not want to reduce rates too quickly to prevent the jump.
