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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

Rising Household Debt: A Problem?

Rising Household Debt: A Problem?

JEONG Young-Sik

Oct. 7, 2009

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Originally released on August 19, 2009

1. Rising Household Debt

Despite the current economic recession, household debt and home equity loans, in particular, are rising sharply. From January to July 2009, home equity loans at commercial banks rose by 22.6 trillion won, 8.6 trillion more than the increase during the same period of 2006 when there was a housing boom. While major countries, particularly the US, are experiencing a decline in household debt, strangely, Korea's household debt is increasing despite the current recession. For this reason, many have expressed concerns that the rising household debt could pose a risk to the Korean economy. This report is aimed at identifying the reasons why household loans are increasing during the recessionary period and whether rising household debt poses any threat to the Korean economy.

The recent rise in household debt, particularly household loans, is mainly led by the government's aggressive measures to prevent the economy from falling into a deeper slump. Although Korea isn't the epicenter of the global financial crisis, the government took on such strong measures as drastic rate cuts, massive liquidity injection and deregulations of the real estate market. The BOK lowered its benchmark rate by 3.25 percentage points to 2.0% in February 2009 from 5.25% in October 2008. In addition, it reclassified speculative housing investment and overheated speculative investment zones with the exception of three Gangnam districts, in an effort to revitalize the sluggish real estate market. This contributed to the sharp increase in home equity loans.

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