It is not easy to make a soft landing of household debt with only financial policy
Source: Insurance Research Institute
In countries where the problem of household debt was raised before Korea, an analysis showed that the decline in housing prices due to the rise in interest rates started earlier than the decrease in household debt. It is pointed out that it is difficult to achieve the goal of a soft landing in household debt with financial policy alone without housing policy support.
According to the Korea Insurance Research Institute on the 14th, in a report titled “Cases and Implications of Adjustment of Household Debts in Major Countries,” countries that were directly impacted after the 2008 global financial crisis and countries that experienced a decline in household debt, such as those in southern Europe where the fiscal crisis occurred, experienced significant increases in interest rates. He analyzed that housing prices fell and household debt adjustments began after that.
The Federal Reserve (Fed), the central bank of the United States, raised its key interest rate from 1% to 5.25% from June 2004 to June 2006 in response to concerns about a housing price bubble. Since then, housing prices in the United States have fallen, and the financial crisis triggered by the subprime mortgage crisis in the United States in 2008 affected the global financial market.
For example, in the UK and Ireland, large-scale liquidity risks occurred as foreign funds flowed into deposits escaped due to financial market instability. In southern European countries, housing prices fell and household debt adjustment started as the interest rate on 10-year government bonds rose from the 4% level in 2009 to up to 30% (Greece) in 2012.
In terms of household debt-to-disposable income in these countries, the US, UK and Ireland fell from 143.7%, 166.8%, and 231.6% in 2007 to 104.1%, 141.7%, and 130.7% in 2019, respectively. In Spain and Portugal, household debt as a percentage of disposable income also fell from 149.2% to 105.3% and from 150.6% to 122.5%, respectively.
In the past, when household debt to disposable income rose (falls) in countries that had undergone household debt adjustment, house prices rose (fall), but after the adjustment of household debt was completed to some extent, house prices rose even though household debt did not increase. analyzed.
Seong-Hoon Yoon, Senior Research Fellow, said, “It is speculated that this is because the housing supply contracted at a time when household debt adjustment and housing prices were falling at the same time. Household debt has also increased and house prices have risen.
On the other hand, in Australia, France, Sweden, Canada, and Korea, neither household debt adjustment nor house price adjustment were made during the same period.
The report argued that a soft landing of household debt is possible only when housing prices are stable, as there has never been a case in which household debt has been adjusted without housing price adjustments among major OECD countries.
Senior Research Fellow Yoon said, “In the sense that an increase in household debt is accompanied by an increase in housing prices, and a decrease in housing prices precedes the adjustment of household debt, it is difficult for the financial authorities to respond to household debt alone, and housing policies that can stabilize housing prices downward We need to work together,” he said.
He added, “If the Bank of Korea raises interest rates further, housing prices may fall. said.