S. Korean household debt repayment ability weakens

SEOUL, Nov. 19 (Yonhap) -- South Korean households' ability to repay debt
worsened in the first half of this year on falling income levels, but massive
loan defaults are unlikely as the chance that home loans will turn sour is low,
the central bank said Thursday.

The ratio of households' financial debt to disposable income rose to 1.43 in the
first half of this year, compared with 1.4 at the end of 2008, the Bank of Korea
(BOK) said in its semi-annual financial stability report.
The figure marked the highest level since the BOK began to compile related data
in 2002. The ratio has been on an upward trend since 2004, when the ratio stood
at 1.13, according to the central bank.
"Korean households' ability to service debt weakened this year as individual
disposable income is estimated to have fallen due to stagnant job markets," said
Kim Yong-sun, an official at the BOK. "The ratio may rise gradually down the
road, considering income growth has not yet bounced back to pre-crisis levels."
The BOK noted that household debt growth is likely to continue its upward trend
for the time being, led by demand for mortgage loans, but dismissed the
possibility that a massive loan default is likely.
"Households' burden to repay debt may rise as market interest rates are
experiencing upward pressure, but the chance of a large-scale loan default is low
because the soundness of Korea's mortgage loans is relatively better than that in
other countries," Kim said.
Amid record-low borrowing costs and signs of an economic recovery, demand for
mortgage lending rose in expectation of further gains in housing prices this
year, sparking worries about a possible asset bubble. The financial watchdog
stiffened its regulatory controls on home loans in July and September.
The report comes as the BOK froze its key interest rate for the ninth straight
month at a record low of 2 percent last Thursday. It cut the rate by a total of
3.25 percentage points between October 2008 and February in a bid to bolster the
slowing economy.
Market rates have already risen on expectations that the central bank will
conduct a rate increase as the economy is recovering at a faster-than-expected
pace. Rising debt and faltering real income are dealing a blow to households'
ability to service their debts, which amounted to 818.4 trillion won (US$708.4
billion) as of the end of June, up 2 percent from three months earlier, the
report showed.
The BOK said authorities need to adequately use micro and macro policy tools to
stem excessive growth of household debt and market expectations for a rise in
housing prices.
sooyeon@yna.co.kr
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