Recent Changes in Korean Households' Indebtedness and Debt Service Capacity

Recent Changes in Korean Households' Indebtedness and Debt Service Capacity
Kim, Joon-Kyung
Korea; Household Indebtedness; Mortgages; Debt service capacity; Wealth Distribution; Mortgage loan regulation policy
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Series/Report no.
KDI Working Paper Series;08-23
After the 1997 financial crisis in Korea, household debts have rapidly expanded. This paper evaluates the current status of Korea’s household debts with a focus on household debt service capacity using micro data sets collected by Korea National Statistical Office between 2000 and 2006. The most distinctive feature of household debts is that the consumer loans were mostly distributed among the higher income and the wealthy households. During 2000-2006, given the fact that consumer loans were relatively concentrated on the high-income class, the price of real estate steadily increased adding to the wealth of the riches that resulted in the worsening of wealth distribution. The fact that the high-income class borrowed more consumer loans in recent years means that the household sector in Korea is relatively less vulnerable to the changes in market interest rates, downturn of the economy, and consequent increase in the rate of unemployment. This is contrast to the case in the US where sub-prime mortgage loan was largely extended to low-income class. Overall, the mortgage loan stabilization seen in Korea recently is greatly attributed by both LTV and DTI regulations as well as the multiple mortgage loans regulations. However, the proportion of real estate asset out of the total asset for household is much greater in Korea than other countries taking up 83% of total asset in 2006. In general, given the fact that the growth of household income, which is the fundamental source for debt service capacity, has been sluggish for the recent years, if the market value of real estate declines due to the global economic crisis then Korea will become more vulnerable to external shock. If the recent global financial crisis continues to bring further negative impacts to Korea leading to asset deflation in the real estate sector, the households’ debt service capacity will deteriorate, further reducing private consumption and aggregate demand which in turn further magnifying asset deflation and fueling the vicious circle.
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