50 million more than last year
Household total interest expense is 70 trillion won, ‘highest in history’
The 2030 generation, who bought their own house due to excessive debt
Concerns about direct hits such as vulnerable borrowers
Will the ‘house built on debt’ collapse?
This year, household interest expenses are expected to rise to an all-time high of about 70 trillion won. Interest expense per capita is expected to increase by about 530,000 won from 3.01 million won last year to 3.54 million won this year. This is because lending rates are expected to continue rising in line with the Bank of Korea’s rate hike this year. Analysts say that vulnerable households who have purchased houses with excessive debt or have poor income against interest expenses will be hit directly.
This year’s household interest expense is 70 trillion won, ‘highest in history’
According to the Bank of Korea’s Financial Stability Report on the 2nd, household interest expenses (based on the base rate of 1.00% per annum) last year were estimated at 59 trillion won. This is an increase of 5.8 trillion won compared to 2020 (53.2 trillion won). This year, it is expected to record an all-time high of 69.49 trillion won, an increase of 10.49 trillion won from last year.
It is above the level of 2018 (60.4 trillion won), the highest level since the BOK compiled household interest expenses. In 2018, household credit was worth 1,500 trillion won, but the BOK’s base interest rate was 1.5 to 1.75% a year, which is higher than now, and the interest burden was considerable.
This year’s interest expense is the amount calculated based on the assumption that the BOK will raise the base rate by an additional 0.75 percentage points within the year to 1.75 percent per annum. In addition, we considered the household loan estimate at the end of 2021 (1848 trillion won) and the proportion of bank variable rate loans (75.7% based on the balance) in November last year. This year’s household loan was calculated on the premise that last year’s estimate (1760 trillion won) would increase by the upper limit (5%) of the financial authorities’ 2022 household loan target (4-5%).
Considering the number of people who took out household loans last year (19.6 million), it is estimated that the interest expense per person will increase from 3.01 million won last year to 3,545,000 won this year.
There are also many observations that the household interest expense burden will exceed the estimate. This is because the rise in market interest rates and lending rates is expected to exceed the rate of increase in the base rate. In November of last year, the interest rate on mortgage loans at deposit banks (based on the weighted average and new handling amount) rose 0.25 percentage points from the previous month to 3.51%, the highest since July 2014 (3.54% per year). The interest rate on credit loans also rose 0.54 percentage points to 5.16% per annum, the highest since September 2014 (5.29% per annum). In November of last year, interest rates on mortgages and credit loans rose by 0.92 percentage points and 1.66 percentage points, respectively, compared to the end of 2020. This is significantly higher than the base rate hike (0.5 percentage point) during the same period.
11.3% of borrowers in 2030 ‘red light’… Fear of hitting the real economy
There is also a growing concern that the rising household debt and interest expenses will increase household insolvency and become an impediment to the recovery of the real economy. There is a high concern that young vulnerable borrowers who have prepared borrowings from all directions to purchase an apartment in Seoul will be hit directly. The BOK considered the threshold at which household debt suppresses consumption as 45.9% based on the total debt repayment ratio (DSR, annual loan principal and interest repayment ÷ annual income). Last year, the proportion of people in their 20s and 30s who exceeded this threshold reached 11.3% of the total. As the interest expense increases, this proportion increases even more.
The possibility of insolvency of the homeowners in Seoul is considerable. According to the Housing Finance Research Institute under the Housing Finance Corporation, the housing purchase burden index in Seoul rose 9.1 points in the third quarter of this year to 182, a record high. The housing affordability index indicates the burden of repayment of principal and interest when a middle-income household takes out a loan to purchase a house with a median price. When this index is 182, it means that 45.5% of the monthly income is used to pay off the loan principal and interest.
Some analyzes suggest that households’ interest expenses may reduce their spending and have a shock to the real economy as the repayment pressure increases excessively. Economist Irving Fisher also warned of ‘debt deflation’, which could lead to a vicious cycle that could lead to a reduction in corporate investment and production, eroding household income again.
Atif Mian, a professor of economics at Princeton University, and others also warned in their famous book, Houses of Debt, published in 2014, that “If you look back on history, most serious recessions were preceded by a rapid accumulation of household debt and a sharp drop in asset prices.” . This book was translated by Park Ki-young, a member of the Bank of Korea Monetary Policy Committee, who took office last year, and Koh Seung-beom, chairman of the Financial Services Commission, recommended it to FSC employees. It also drew attention as it matched the situation of household debt in Korea.
By Kim Ik-hwan, staff reporter lovepen@hankyung.com
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