It is estimated that the combined debt of Korean households will reach 1.1 quadrillion won (US$993 billion) at the end of this year. The amount increased by no less than 22 trillion won in just three months from day one of the new Deputy Prime Minister’s housing market stimulus plan for economic revitalization.
According to the Bank of Korea, the household liabilities totaled 1,060.3 trillion won as of the end of September to record a 2.1 percent increase from the previous quarter and a 6.7 percent increase from a year ago. The upward trend is likely to continue in the fourth quarter given seasonal factors.
The liabilities began to increase at an especially fast pace after the inauguration of Deputy Prime Minister and Minister of Strategy and Finance Choi Kyung-hwan in July. Upon taking office, he relaxed the loan-to-value (LTV) and debt-to-income (DTI) ratios in order to reinvigorate the construction and housing markets. The Bank of Korea cut the key rate in August and October, too. The government has driven the people to buy homes on loans. The bed debts in the non-banking sector slightly decreased while the mortgage loans in the banking sector went up.
The real estate transaction amount skyrocketed between July and October. Specifically, a total of 108,721 transactions were made in October, which is 27.8 percent higher than the average for the first half of 2014. However, market insiders are rather skeptical. “The effect is likely to be short-lived at best,” one of them commented, adding, “What matters is the sustainability of such transactions but anxiety prevails for now.”
In fact, the government is somewhat embarrassed at the current situation, in which the interest rate cut is resulting mostly in the conversion from large-deposit rental agreements (jeonse) to monthly rent homes, rather than an increase in housing transactions. Under the circumstances, it is planning to supply more rental houses than scheduled next year.