South Korea is struggling with soaring debt levels in both the public and private sectors. The country’s national debt reached a record high last year, and the debt-to-gross domestic product (GDP) surpassed 50% for the first time in history. Household debt also surged to a new high of 1,896 trillion won in the second quarter of this year.
Debt levels have risen globally, especially since government spending increased significantly during the COVID-19 pandemic as governments introduced fiscal stimulus packages. Developed countries, with the U.S. leading the pack, are dealing with unprecedented levels of government debt. What’s troubling is that while the rest of the world emerged from the pandemic with moderate growth in household borrowing, Korea has seen a steep rise in household debt despite higher interest rates.
What is fueling Korea’s surge in household debt? Experts point to a renewed home-buying frenzy driven partly by conflicting government policies and market anticipation that home prices will continue to rise.
Yoon administration faces rising national debt amid ongoing tax shortfalls
The reasons why government debt levels have been mounting are pretty straightforward. The Yoon Suk-yeol administration pushed for fiscal austerity measures to curb government spending growth for long-term sustainable budget management and tax cuts to boost private investment and consumption.
But the government’s ambitions were thwarted by a sluggish economy, namely a slowdown in exports and weak domestic demand, which led to a drop in corporate taxes and tax shortfalls for two consecutive years. Tax revenue shortfalls reached a record 50 trillion won last year due to weak corporate earnings.
Faced with a fiscal deficit—the difference between revenue and public expenditure—the Yoon administration resorted to increasing government borrowing to cover the shortfall, leading to a rise in national debt. The government plans to issue 201.3 trillion won in government bonds next year, with net issuance set to reach 83.7 trillion won, up 68% from this year.
Despite the government’s fiscal austerity measures, which limit government spending growth to 3% annually, the fiscal deficit is expected to amount to 70 trillion won next year, prompting additional government bond issuance and mounting national debt.
The country’s national debt hit a record high of 1,126.7 trillion won last year, a 59.4 trillion won increase from 2022. The government projects national debt to reach 1,277 trillion won by the end of next year, more than 200 trillion won higher than in 2022, Yoon’s first year in office, when it stood at 1,067.7 trillion won.
Aggressive real estate investment fuels household debt growth
The sharp rise in household debt is more perplexing, considering higher interest rates and housing prices. Aggressive real estate investment has been driving up household loans, especially mortgage loans, extended by banks in Korea.
The mortgage loan balance at five major banks—KB Kookmin, Shinhan, Hana, Woori and Nonghyup—stood at 559.75 trillion won at the end of July, up 7.5975 trillion won from the previous month. This marks the largest monthly increase on record.
Borrowing costs in Korea remain high. In January last year, the Bank of Korea raised interest rates to a 15-year high of 3.5% to combat inflation and has kept rates unchanged for 18 months.
Experts attribute the housing market recovery to a renewed demand for real estate investment, partly fueled by policy-supported mortgages, which offer lower rates than standard mortgages, such as the Bogeumjari loan and the Didimdol loan provided by the Korea Housing-Finance Corporation.
Mortgage loans extended by banks totaled 32.1 trillion won from January to July this year, according to the Financial Services Commission. Policy-backed loans such as the Didimdol and Bogeumjari accounted for 22.3 trillion won, or 69.5%, of these loans.
The government is now facing criticism for inconsistency in managing household debt. “The government kept rolling out policy-supported mortgages while stressing the importance of limiting household debt growth and preventing the housing market from becoming overheated, sending mixed messages,” said a real estate market insider.
This, coupled with a widespread “buy now or miss out forever” panic in the housing market, drove many first-time homebuyers to purchase homes despite high interest rates. Homebuyers are anxious that the upward trend in apartment prices will continue and that they will miss the chance to buy homes. According to the Korea Real Estate Board, apartment sale prices in Seoul have been rising for 23 consecutive weeks as of August 29.
Financial authorities have vowed to curb mortgage loan growth by implementing the second phase of stricter debt service ratio (DSR) rules next month. Banks have witnessed a surge in last-minute demand for loans as homebuyers try to secure mortgages before tighter restrictions take effect on Sunday.
The Bank of Korea also cited soaring housing prices and surging household debt as reasons the central bank is delaying rate cuts. Korea’s household debt to GDP ratio is among the highest among major countries, at 93.5% as of last year. “There seems to be a lack of reflection on how the country ended up with such high levels of household debt and structural issues, like the rising real estate prices in the Seoul metropolitan area, to the extent that the BOK now has to hesitate cutting interest rates,” said BOK Governor Rhee Chang-yong.
