Biz: "Top of the World": 2.2 Trillion Won
Debt Surge in Four Days
8 July , 2024
Understanding Jeonse: South Korea's Housing Time Bomb
Before diving into this news article, it's crucial to grasp the concept of Jeonse, a unique key money-based house renting system in South Korea. Instead of paying monthly rent, tenants hand over a lump sum amounting to 60% or more of the house price to the landlord. The landlord then returns this amount when the lease expires.
This arrangement is like a ticking time bomb for the South Korean economy, hidden from government oversight because it's a private contract and loan between two individuals.
Oh, look, Korea is leading the world again – in debt, that is. Our debt burden is one of the highest globally. Last year, if a Korean household earned 10 million won, 1.42 million won of that was siphoned off to pay down debt and interest. What an achievement.
The Bank for International Settlements (BIS) tracks 17 major economies quarterly, and guess what? Korea ranks fourth in debt burden relative to income. Norway tops the list, followed by Australia, Canada, and then us. We're doing twice as bad as the U.S., Japan, and Germany.
One glaring problem with our economy is that households are drowning in debt compared to their income, which sucks money out of circulation. The debt burden is climbing at a breakneck pace, with the share of income going to debt payments jumping by 0.8 percentage points last year. We went from fifth place in 2021 to the second fastest growing debt burden in 2022, and we're comfortably sitting at fourth place now.
Out of the 17 countries BIS tracks, seven managed to reduce their debt burden last year. With sky-high interest rates, it's nearly impossible to lower the interest burden without piling on more debt. So, these countries cutting down their debt burden must have really put in the work to slash their household debt.
But not us. In July alone, household loans from major banks soared by over 2 trillion won. And just four days into July, household loans from the five largest banks ballooned by nearly 2.2 trillion won. Last month, these loans shot up by more than 5.3 trillion won in a single month. Why? Because everyone is expecting interest rate cuts and scrambling to take on debt before loan limits are tightened.
And let's not forget the households' mounting Key money(Jeonse) borrowing from their Key money(Jeonse) tenant due to the recent rise in Key money(Jeonse) rent, which adds another layer to the problem. These private contracts aren't counted in official government household loans but are undoubtedly household debt. If they were included, we'd probably top the world, not just rank fourth.
There's also worry that the recent spikes
in the stock market and real estate market are pushing people to borrow even
more. Korea's household debt remains among the highest globally, putting a
colossal strain on the economy and households.
We'd better keep a sharp eye on this ticking time bomb of household debt before it blows up in our faces.