(EDITORIAL from Korea Times on March 3)

An alarm bell on debt

The rising pace of household debt is alarming. Mortgage loans at the nation's seven major banks increased 3.5 trillion won in the first two months of the year, an eight-fold gain compared with a year ago when the home-backed loans rose a moderate 423 billion won. The news comes after the Bank of Korea reported that household debt hit a record high of 1,089 trillion won at the end of December.

It's not hard to understand why bank mortgage loans have been rising rapidly. It's certainly part of the aftermath of the government's easing of real estate regulations in August, apart from the central bank's interest rate cuts twice last year.

More recently, it's the result of more households opting to buy homes by taking out mortgages after enduring a surge in "jeonse,'' lump-sum deposits for home leases unique in Korea.

Concern about household debt is nothing new, but the problem is that it is expanding so quickly.

Policymakers say Korea's household debt is manageable and has yet to reach a dangerous level because assets outdo liabilities. They also claim that delinquencies have remained low with nearly 70 percent of the debt taken on by high-income families.

But at a time when household debt has already surpassed 1,000 trillion won, more economists seem to believe that the situation can go from bad to worse. In fact, the ratio of household debt to disposable income, an indicator of households' debt burden, reached 160 percent at the end of 2013, which is higher than the OECD average of 135 percent and America's 115 percent before its housing crisis in 2008.

It's no exaggeration to say that the bloated household debt could be a ticking time bomb. This worry is all the more realistic, given the U.S. Federal Reserve's looming decision to raise interest rates, which will prompt Korea to lift rates. In this case, more households could go insolvent and financial firms would have to bear the brunt of the credit plight.

The government is facing a dilemma because its plan to rev up the sagging economy by propping up the real estate sector will result in household debt surging down the road. As things stand now, it seems inevitable that things will get serious.

Financial authorities have come up with measures to put the brakes on the soaring household debt, including a debt-refining program announced last week. But these are certainly insufficient.

The focus should be concentrated on curtailing the total amount of household debt. In particular, it will be critical to map out measures to help borrowers with low credit scores reduce debt.

Of course, all this requires policymakers to be more precise and careful so that consumption won't be set back.
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