According to the Bank of Korea (BOK), as of the first quarter of 2024, South Korea’s household debt to gross domestic product (GDP) ratio reached 92.1%, ranking fifth among the top 30 major economies. Until recently, rising interest rates on housing loans made debt repayment more difficult, fueling a decline in consumption. In response, the Sungkyun Times (SKT) aims to analyze the current issues of household debt and explore possible solutions.
Household Debt at 37°N, 127°E
-Holes in the Wallet
Household debt is an economic term that encompasses the total amount of money a household has borrowed from financial institutions and its obligation to repay it. It mainly consists of mortgage loans collateralized by real estate, and credit loans based on the individual’s credit score. Although it is often used as a temporary solution for housing or living expenses, if its amount exceeds a certain level, debt becomes a burden not only to individual households but also the national economy. Recently, the household debt problem has been worsening in many countries, primarily due to the increasing uncertainty of the global economy. For instance, in the United States (U.S.), debt burdens intensified due to increased spending after the COVID-19 pandemic and relatively high interest rates. South Korea, in particular, reported a high debt-to-GDP ratio compared to other advanced countries in 2024, with an average annual increase of 1.5% over the past five years — second only to Hong Kong. This concern will only grow if not addressed and imbalances accumulate, posing risks to the country and further limiting the BOK’s monetary policies.
-The Economic Domino Effect
The rapid rise in household debt can be attributed to several underlying economic issues in recent years. In May 2020, the base interest rate dropped to a historic low of 0.5%, triggering a surge in mortgage loan demand. This eventually caused housing prices to rise, encouraging further purchases and overwhelming the real estate market. During this time, government policies, such as relaxed loan regulations and tax cuts, also contributed to the large number of mortgages. Also, the decrease in real income due to unemployment amid inflation during the COVID-19 pandemic further increased household reliance on loans. In March 2020, the number of employed individuals had fallen by 196,000 compared to the previous year. As challenges in the labor market persisted, many households took out loans to cover essential living expenses. However, when the BOK began gradually raising the base interest rate from 0.5% in 2020 to 3.5% in January 2023, it caused a significant rise in loan interest rates. This affected mortgage interest rates, which, according to an analysis by the National Assembly Research Service, rose from 2.5% in 2020 to 4.24% in 2022. In an interview with SKT, a worker in his f ifties stated, “After taking out a mortgage in 2020, the rising interest rates became a serious burden on our household finances.” Although the BOK lowered the base interest rate to 3.25% in October last year and to 2.75% in February, it is yet to be reflected in the banks’ loan interest rates, maintaining the f inancial strain on existing borrowers.
Storms of Debt
-Housing Dreams, Debt Nightmares
Recently, high interest rates and changes in the real estate market have intensified the burden of household debt. As of the second quarter of 2024, mortgage loans accounted for 61.4% of the total household debt in Korea, showing a 5.6%p increase since the end of 2020. Considering that most household loans are taken out at variable rates, they fluctuate depending on economic conditions. As both base and market interest rates continued to rise until 2022, the housing market started to shrink, and as a result, housing prices decreased by 4.6% nationwide in 2023. Generally, a drop in real estate prices reduces household asset values. Even though households may attempt to lower consumption and manage bills by disposing of assets, this becomes difficult if the estate market stagnates. The recent base interest rate cut to 2.75% may ease such worries if applied in bank loan interests. However, it could also incentivize the further borrowing of mortgages and fuel real estate prices. Such fluctuations in interest rates burden borrowers, further damaging their household finances.
-The Cashflow Desert
As rising household debt increases burdens and weakens consumption, businesses reliant on the domestic market face complications. Lower spending reduces revenue, making company loan repayments more difficult, prompting them to cut employment or reduce production. The situation worsens in an economic downturn as businesses, especially small and medium-sized enterprises (SMEs), are at a higher risk of restructuring or bankruptcy. This exacerbates the issue of defaulted loans in the financial sector, undermining confidence in the economic system and causing instability. In the first half of 2024, delinquent SME loans at five major banks, including Kookmin Bank and Shinhan Bank, exceeded ￦3 trillion, a 34.2% increase compared to 2023. If such a trend continues, financial institutions will tighten their loan reviews to reduce risks, further exacerbating SMEs’ struggle to secure funding. A CEO of an SME stated in an interview with the SKT, “SMEs have limited credit, technological capabilities, and capital, making it already difficult to obtain loan approvals.” In fact, while loan volumes for large corporations in 2024 increased by 37% compared to the previous year, loans for SMEs only rose by 1.6% at four main regional banks — a prevalent pattern observed among other commercial banks. These figures indicate that companies, especially SMEs, will face high hurdles in securing financing, which could lead to a broader slowdown in domestic industry growth.
-The Ticking Time Bomb
As household debt repayment pressures escalate, debt delinquency rates rise, posing significant challenges for financial institutions. The heavy dependence on mortgage loans in Korea signifies that a downturn in the housing market could destabilize the financial system. When delinquency rates rise, banks face the risk of growing non-performing loans (NPL), leading to capital losses. The delinquency rate on won-denominated loans was 0.27% in November 2022 but rose to 0.46% in November 2023 and 0.52% in November 2024. Typically, delinquency rates rise during the quarter and decrease at the end when banks tighten loan management; however, the trend shows an overall rise. Notably, self-employed loan delinquencies reached a record high of ￦18.1 trillion in the third quarter of 2024, with no signs of slowing down. To manage the rising delinquencies, financial institutions may respond by raising interest rates or reducing new loans. For example, the Industrial Bank of Korea raised loan interest rates by up to 0.4%p, and Woori Bank suspended credit loan sales through online channels. However, these measures also have a downside, slowing the flow of credit, as well as reducing consumption and investment. If financial stability collapses, it could severely impact the national economy, worsening its downturn.
A Roadmap for Overcoming Household Debt
-Toward a Debt-Free Horizon
Addressing household debt requires coordinated efforts from individuals, businesses, and the government, with special importance placed on wise financial management by individuals. Developing responsible spending habits and active participation in financial education programs run by the government and institutions can help achieve this goal. Singapore’s government-run MoneySense program, for example, provides financial education to enhance household financial stability. While Korea has similar programs, sessions targeting adults and working professionals remain relatively limited. Expanding financial education nationwide is crucial to improving financial management skills. In addition, government involvement in the real estate market is also essential for tackling household debt. The Korean government focuses on protecting homebuyers by expanding public rental housing and adjusting mortgage regulations. However, since the market is influenced by external factors, strategies must be put in place to effectively respond to the fluctuations in interest rates. Regulatory measures alone are insufficient to resolve housing market challenges. A more sophisticated policy approach is needed, such as focusing on increasing the public rental housing supply based on regional demand. Indeed, a balanced Business approach is essential to minimize market instability.
-Oasis in the Desert of Household Debt
Financial institutions must take an active role in tackling household debt. Strengthening loan risk management is essential, as they must thoroughly assess the borrower’s ability to repay the debt. Currently, some institutions approve loans that are higher than what households’ incomes can support, increasing their reliance on loans. To prevent this, more comprehensive credit evaluation standards must be established. For instance, Singapore’s Total Debt Servicing Ratio (TDSR) system is set at a maximum of 55% of the borrower’s debt-to-income ratio. While this is higher than Korea’s 40%, the system factors in the borrower’s age to assess their repayment abilities, limiting loans given to those close to retirement. Moreover, expanding personalized financial services can contribute to managing household debt. In the U.S., an income-based loan repayment program is available, adjusting monthly repayment amounts based on one’s income. When a borrower’s income is low, repayment amounts decrease, and in some cases, remaining debt is forgiven after a certain period, alleviating the borrower’s financial burden. This way, borrowers would have more disposable income, positively impacting general business revenues and stability. In Korea, loan policy reforms and customized financial products are needed, especially to support those struggling with repayment and, ultimately, domestic market-focused companies. Implementing such systems will not only alleviate household debt but also minimize the negative effects of decreased consumption on business and industry performances.
-Defusing the Debt Bomb
Stricter loan regulations and delinquency management policies must be implemented by financial authorities. Stabilizing thef inancial market through interest rate adjustments is crucial for reducing household burdens and enhancing market liquidity. However, finding the perfect equilibrium is challenging, as aggressive cuts may aggravate inflation, while high rates could worsen household debt burdens. Rather than focusing solely on short-term rate adjustments, a gradual policy for long-term financial stability is essential. For instance, Korea has been using the stress DSR to reduce the loanable limit by incurring an additional charge to the interest. With the measure expected to enter its third phase in July 2025, the stress rate will now be applied to non-banking financial institutions as well as a wider array of loans. Additionally, policies to curb the rise of NPLs are necessary. During the 2008 global financial crisis, the U.S. introduced the Troubled Asset Relief Program (TARP) to support liquidity and resolve NPL issues. Although it has not yet reached a point of crisis, Korean financial institutions can reference such a model by implementing appropriate restructuring to prevent rising delinquency rates. To avoid future financial crises and ensure stability, regulations and NPL processing systems must be strengthened.
All people carry debt, not only in the form of money, but also time, opportunities, and responsibilities. Household debt is not just a matter of numbers. It is a weight that the entire society should bear. While debt serves different roles for individuals, businesses, and the nation, an unbearable burden will emerge if the balance is disrupted. Beyond simply reducing household debt, one must focus on elaborating effective ways to manage it.