KDI "1,900 Trillion Household Debt to Peak in a Few Years"

[Financial News] An analysis has emerged that the household debt ratio to GDP will peak and fall within a few years. As life expectancy has increased rapidly, the middle-aged and elderly have raised the household debt ratio over the past 20 years, but demographic changes due to super-aging are expected to bring it down. As of the first quarter of this year, Korea's household debt (household credit balance) is at a record high of 1,928 trillion won. The household debt ratio to GDP also reaches 90.3%.
 On the 5th, the Korea Development Institute (KDI) predicted in its report 'Impact of Demographic Changes on Household Debt' that the household debt ratio will peak within a few years and then shift to a downward trend.
 According to the report, the household debt ratio to GDP is highly correlated with life expectancy and the decrease in the young and middle-aged population. Korea's life expectancy is expected to increase from the current 84.5 years to 90.9 years by 2070, but the rate of increase is expected to stagnate.
 An analysis centered on 35 countries, including the Organization for Economic Cooperation and Development (OECD), found that when life expectancy increases by one year, the household debt ratio increases by about 4.6%p. On the other hand, if the proportion of the young and middle-aged population (25-44 years old) decreases by 1%p and the proportion of the elderly population (65 years and older) increases by 1%p, it is estimated to decrease by about 1.8%p. At this rate, the household debt ratio in 2070, 45 years from now, is expected to be 27.6%p lower than it is now.
 The current increase in household debt is the result of the middle-aged and elderly accumulating financial assets such as cash to prepare for retirement as life expectancy increases, while the demand for housing purchases among the youth is high. In this process, the elderly supply funds, and the youth borrow them to buy houses, leading to a rapid increase in household debt.
 Kim Miru, a KDI research fellow, said, “If the proportion of the elderly increases while life expectancy stagnates, the overall financial supply capacity of the economy will decrease,” adding, “As the youth population decreases, the demand for household funds will also decrease.”
 Specifically, looking at the contribution of factors to household debt over the past 20 years since 2003, the increase was 33.8%p. Of this, life expectancy accounted for a significant portion at 28.6%p, the population proportion was 4.0%p, and financial soundness regulations had a suppressive effect on household debt at -2.3%p.
 Researcher Kim suggested that a shift in household debt management policies is needed in line with demographic changes. Instead of arbitrarily managing household loans with a total amount target, it should focus on the borrower's repayment ability and the soundness of financial institutions. He argued that the regulation on the Debt Service Ratio (DSR) should reduce exceptions, and the supply of policy finance at lower than market interest rates should also be reviewed.
 The government has set a target to manage the household loan growth rate within 3.8% this year, and plans to lower it to 80% of GDP in the mid to long term.
 Researcher Kim emphasized, “It is important to gradually reduce DSR exceptions and apply risks differently according to the purpose of the loan and the repayment structure,” adding, “It is necessary to adjust the excessive guarantee ratio of policy finance and introduce a 'flexible wage system based on job and performance.'”
skjung@fnnews.com Jung Sang-kyun Reporter