Luminous residential buildings and homes in dusk in Mogbo, South Korea, on Friday, August 16, 2024.
Bloomberg Bloomberg Gety pictures
Central banks, to a large extent, have a comprehensive mandate: to ensure price stability and inflation control in a country. South Korea politicians need another responsibility: high home debt management.
It refers to family debts often, if not always, in Korea's monetary policy decision.
” A letter on January 2 “There were some criticisms about the reason that the Korea Bank has taken into account and seems excessively cautious when deciding the basic price.”
Why, then, is family debts very important for BOK's monetary policy considerations? The short answer: It is very high. The long answer? More complicated.
Park Jeongou, an economist in Nomura in South Korea and Taiwan, told CNBC that Bok is concerned about the negative impact in the long term of high home debts on growth.
“Book (believes) the highest debt burden has weakened the power of spending on families. Meanwhile, the strong debt -funded demand for housing has allocated distorted capital throughout the economy, which leads to further allocation of capital for sectors other than Produce.
Farid housing system
There are two factors that contribute to the rise in debt between families in South Korea is the heavy use of credit cards, and the unique housing system in South Korea.
Possible homeowners can of course buy their own homes, but for those who cannot, they need rent.
But unlike most rental systems around the world, the South Korean tenants pay a deposit known as “Jeonse” or “major money”, instead of the monthly rent, according to Samuel Rai, co -founder, chairman and chairman of the investment group at Endowus.
Jeonse is a deposit of about 50 % -80 % of the market value of the property. At the end of their lease, the deposit is returned to the tenant. For the owner, Jeonse is a interest -free loan, which is freedom of investment.
However, tenants usually get a loan to finance the Jeonse deposit, which Rhee said causes “a lot of excessive burden and debts in the housing system.”
It indicates that although the percentage of home debt to the gross domestic product has not increased significantly in the past few years, interest rates have increased from the burden of debt service, “which was the main concern of the Bok and Korean government.”
RI noted that although BOK has reduced interest rates twice to take it to 3 % at the end of last year, banks did not transfer low interest rates for consumers.
This means that although BOK has reduced prices, the costs of tenants have not decreased.
“An economic disaster”
“The rate of family debt in South Korea is a source of concern because it can affect the economic growth of the country by making the financial sector fragile,” said Ruita Abi, an economist in the International Treasury and the Ministry of Treasury at the Asia Pacific Company at Sumitomo Mitsui Banking Company.
“In the event of the credit crisis (A) because borrowers are unable to pay the debts because it is very huge, the issue will bring intense pressure as well as economic stagnation.”
Abe cited numbers from the Bank of International Settlements, which said that the percentage of family debt in South Korea reached 91 % of GDP as of the second quarter of 2024. Compared, family debt in other developed countries is 68.9 % on average.
For comparison, Data from the International Monetary Fund He showed countries with the highest rate of family debt to GDP among Asian countries in 2023, in 93.54.
The percentage of China, the largest economy in Asia, reached 63.67, while India was 39.16. Japan had 65.66 in 2023.
Abe also said that the debt rate to a disposable net income was 186 % in 2023 in South Korea, swinging from 130 % in 2008.
Data shows that the speed of debt increases is faster than high wages and gross domestic product, which means that the South Korean economy, especially the family sector, is highly dependent on debts.
“If the sector fails to pay the debt, the negative shocks will be huge, which will not be limited in the sector but for the financial sector. If this shock occurs, the economy will be in a disaster. The Korean authorities need to reduce such risks in advance.”
Book dilemma
Book faces a difficult way. It should reduce prices in order to stimulate the slow economy and reduce the burden of debt service, but reduce prices would weaken the victory and may increase imported inflation.
And most importantly, Rhee Endowus said, “The reduction of prices can stimulate an increase in demand for homes, which leads to an acceleration in the distinguished family debts.
“If you reduce interest rates and increase debt and this is used to stimulate the demand for housing, which leads to high prices of homes and rental prices, this is inflation and Book wants to reduce the inflationary effect,” said Re.
Alex Holmes, Asia Research Director at the CNBC Economic Intelligence Unit, told CNBC “CNBC's”Squawk box asia“Earlier in January, the year 2024 was the first year in which family debt decreased as a percentage of GDP, and BOK will not want to reduce prices very quickly to prevent recovery.