Household loans from banks rose 69% in April

As domestic and overseas base rates significantly rose last year, South Korea’s household loans, which decreased by almost eight trillion won last year, are showing a sharp increase. It results from lowered caution against household loans because loan rates from banks declined to the level 20 months ago and real estate transactions revived. It is raising a concern that South Korea’s household debts, which are the highest among advanced countries, can hinder the country’s economic growth if they grow further.

The interest rates of fixed-rate mortgages from four major banks – Kookmin Bank, Shinhan, Hana, and Woori – range between 3.7 to 5.8 percent per year. The lowest rate is more than one percentage point lower than in January this year and is the lowest level since late September 2021, when the Bank of Korea began to raise interest rates. The variable interest rates, which are higher than fixed rates, are also imminent to fall below four percent.

Loan rates are showing a more significant drop than banks’ capital procurement interest rates. It is largely the result of financial authorities criticizing banks’ practice of making excessive gains by utilizing interest rate differences between deposits and loans and putting pressure on banks to lower loan rates. Loan rates are decreasing at an accelerated pace as it is believed that the Federal Reserve is unlikely to further increase interest rates as a series of small and medium-sized banks went bankrupt in the U.S.

What’s problematic is that more and more people are trying to take loans as interest rates decrease. New household loans from the four major banks rose 86 percent and 69 percent in March and April, respectively, compared to the same period last year. Mortgages alone increased by 93 percent and 76 percent each month. As a result, total household loans across the financial industry at the end of last month showed an increase for the first time in eight months. It is concerning that those in their 20s and 30s are again trying to use all available leverage to buy houses after experiencing a real estate price crash.

The ratio of household debts versus South Korea’s GDP is over 100 percent and ranked No. 4 among OECD member countries. The figure is over 150 percent and the highest in the world if considering deposits for leasing housing, which house owners return to tenants as debts. If the debts continue to increase, households’ disposable income will decrease, contracting consumption and lowering the economic growth rate.

The Bank of Korea’s decision to freeze the country’s base rate at 3.5 percent twice, even though the gap between South Korea’s and the U.S.’s base rates became larger, affected the recent loan increase. While the bank stressed that austerity is not over, individuals and households took its interest rate freezing as a sign that austerity is over. The Bank of Korea and financial authorities should take household debt increase as a serious danger signal to the financial system and reassess monetary and financial policies accordingly.