Monday, November 29

“There is no adjustment of household debt without stabilizing housing prices”

Insurance Research Institute ‘Household Debt Adjustment Cases in Major Countries’ Report

There is a consistent flow in the shocks of the US, Britain, and Southern European countries during the 2008 financial crisis
“Cooperation with housing policy is essential for a soft landing” amid rising interest rates and rising inflation

Since there is no household debt adjustment without a drop in housing prices, a research institute suggested that cooperation with housing policy is essential for a soft landing of household debt. It was also pointed out that the Ministry of Land, Infrastructure and Transport is also responsible for the household debt problem.

According to the report ‘Cases and Implications of Household Debt Adjustments in Major Countries’ released by the Korea Insurance Research Institute on the 14th, the cases of countries that were directly impacted by the 2008 global financial crisis and countries that experienced household debt adjustment, such as those in southern Europe that suffered the fiscal crisis, were reported. As interest rates rose sharply, house prices fell first, followed by household debt adjustment.

Looking at the household debt-to-disposable income ratio, the ratio of household debt to disposable income fell from 143.7%, 166.8%, and 231.6% in 2007 to 104.1%, 141.7%, and 130.7% in 2019, respectively, in the United States, the United Kingdom and Ireland before the global financial crisis. Spain and Portugal also fell from 149.2% to 105.3% and from 150.6% to 122.5%, respectively.

The Federal Reserve (Fed), the central bank of the United States, raised its key interest rate from 1% to 5.25% per annum from June 2004 to June 2006 in response to concerns over a housing price bubble. As housing prices fell, household debt became insolvent, triggering the subprime mortgage crisis in the United States in 2008. In southern European countries, housing prices fell and household debt adjustment began as the interest rate on 10-year government bonds rose from the 4% level in 2009 to up to 30% (Greece) in 2012.

According to the report, it can be interpreted that there is no adjustment of household debt without housing price adjustment in view of such a case. Basically, a soft landing of household debt is possible only when housing prices are stable.

“After the global financial crisis, most countries introduced micro-prudential regulations focusing on borrowers’ repayment ability, which slowed the growth of household debt to some extent,” said Yoon Seong-hoon, senior research fellow at the Korea Insurance Research Institute. The expansion is due to the influence of low interest rates, but the housing market is not functioning properly,” he said.

As domestic household debt surged after the outbreak of Corona 19, the Bank of Korea started raising the base rate and the financial authorities announced plans to manage household debt. did. In the case of Korea, as of 2019, the level of household debt as a percentage of disposable income was 190.6%, which is very high among major countries. I thought it was unlikely to lead to anxiety. However, if the rate of interest rate hike accelerates with the recent sharp rise in inflation, the possibility of a fall in housing prices cannot be ruled out.

Therefore, the report said that strict monitoring is needed to monitor the negative impact of a fall in housing prices on household debt repayment capacity or the impact on the soundness of financial institutions through household loans.

Research Fellow Yoon said, “Not only the BOK, the Financial Services Commission, the Financial Supervisory Service, and the Ministry of Strategy and Finance, but also the Ministry of Land, Infrastructure and Transport, cannot be free from the problem of household debt. It has to be done,” he said.

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