South Korean consumers faced with falling home prices and elevated household debt are cutting spending, dragging on demand just as export growth is restrained by gains in the won.
Borrowing and credit purchases rose to a record 937.5 trillion won ($864 billion) in the third quarter, the Bank of Korea said yesterday. At the same time, an index of household consumption fell to a record low, according to a Statistics Korea report last week.
Candidates campaigning for a Dec. 19 presidential election have highlighted household debt as a weakness that remains in South Korea’s economy even after three credit-rating companies upgraded the nation this year. The ruling party’s Park Geun Hye, who leads in polls, proposes an 18 trillion won fund to help avoid defaults by the indebted poor.
“The candidates are all throwing out policy pledges to reduce household debt because it is the biggest risk in the Korean economy,” said Kim Hyeon Wook, an economist at the Seoul-based SK Research Institute and a former Bank of Korea adviser. “The data show the debt is keeping people from spending and that they are saving as a precautionary measure.”
Household debt reached a record 164 percent of disposable income last year, which compares with 138 percent in the U.S. at the start of the housing crisis, according to Royal Bank of Scotland Group Plc.
The won weakened for a third day amid concern the government will act to stem currency gains, closing at 1,086.14 per dollar in Seoul, according to data compiled by Bloomberg. It touched 1,080.05 yesterday, the strongest level since Sept. 9, 2011.
The won is the best-performing Asian currency against the dollar in the second half of this year, threatening to restrain an economic rebound after exports rose for the first time in four months in October. The economy expanded 1.6 percent from a year earlier in the third quarter, the slowest pace since 2009.
The won will extend its rally on speculation the nation will elect a new president next month who is more willing to tolerate a stronger currency, according to HSBC Holdings Plc and Barclays Plc analysts.
Home prices in South Korea have declined 0.2 percent this year through Nov. 12 and 4.1 percent in Seoul, according to data from Kookmin Bank, the country’s biggest mortgage lender. The index measuring consumption from disposable household income was at 73.6 in the third quarter, the lowest since records began in 2003. Fixed expenditures, including interest payments on debt, rose to a record high, according to the same Statistics Korea survey of 8,700 households.
“Rising fixed expenditures can partly be attributed to the increasing burden of interest payments,” said An Ki Tae, an economist at Woori Investment & Securities Co. in Seoul. “That is a major constraint on consumption.”
Main opposition party candidate Moon Jae In has pledged to cap interest rates at 25 percent per year and independent candidate Ahn Cheol Soo’s 2 trillion won “Fresh Start Fund” would prohibit rental deposits paid to landlords from exceeding 3 million won.
The nation has ramped up borrowing as residents started their own businesses and struggled to pay for housing, said Kwon Young Sun, a Hong Kong-based economist at Nomura International Ltd. The cost of homes in Seoul and surrounding areas increased 66 percent in the decade to February 2008 before they began to stagnate.
Bae Ji Hoon borrowed 200 million won six years ago to buy a three-room apartment outside Seoul. The Hyundai Motor Co. salesman said he and his wife have had to cut back on purchases as the mortgage payment adds to rising education costs for his 7-year-old son.
“My wife and I are trying to reduce spending as much as we can,” Bae said. “We’re going to cheaper places and avoiding department stores and nice restaurants.”
South Koreans continued to expand debt while other advanced countries deleveraged after 2007 and 2008 because the country experienced less of a shock from the crisis, said Park Chang Gyun, a professor at Seoul-based Chung-Ang University business school. The U.S., U.K., Germany and Japan have cut household debt since 2007, according to an Organization for Economic Cooperation and Development report.
Household lending from local banks and non-bank institutions rose 3.7 percent from a year earlier to 648.5 trillion won as of the end of September, the smallest increase since the BOK began keeping data in 2003. The government announced measures to curb debt last year such as requiring lenders to boost fixed rate loans and setting limits on credit card lending.
Still, high household debt will contribute to a weaker “overall operating environment” for banks over the next four to six quarters, Moody’s Investors Service’s senior credit officer Youngil Choi told reporters on Nov. 13. Moody’s said in a report last month that banks have enough capital to withstand increasing defaults while characterizing household leverage as a “systemic concern.”
The nation’s non-performing household loan ratio hit a six-year high of 0.8 percent as of September, the Financial Supervisory Service said on Nov. 7. Non-performing loans are those in default for more than three months.
South Korea is unlikely to face a banking crisis even in the event of a further 20 percent decline in housing prices, according to the Korea Institute of Finance. Under such a scenario losses at financial firms would increase to 16.6 trillion won, according to the report.
The main risk posed by household debt is that it may hinder consumption and growth, said Erik Lueth, an RBS economist based in Hong Kong. The nation’s consumer confidence for October fell to a nine-month low.
Chun Bong Sil, 40, who runs a textile trading firm in Seoul, paid 300 million won for an apartment in the capital last year. Since then, his business has slowed as the European debt crisis and stronger currency crimp exports.
“I felt like I was on top of the world when I finally owned my own home,” he said. “Now I think I made the most stupid mistake in my life as I have to spend almost half of my income to pay debt while my business is slumping.”
Elsewhere in Asia today, Singapore’s inflation slowed to 4 percent in October, easing from a 4.7 percent annual pace in September.
Taiwan’s industrial output rose 4.56 percent in October from a year earlier, after a revised 2.88 percent gain in September, the Ministry of Economic Affairs said today. Taiwan also reported its final estimate of third-quarter gross domestic product today. Growth was 0.98 percent compared with a year earlier, after a preliminary estimate of 1.02 percent.
In Europe, data from Germany’s Ifo institute may show business confidence fell to the lowest in almost three years in November, according to the median forecast of 48 economists in a Bloomberg News survey. France will also report industrial confidence data today. The sentiment index may have recovered to 87 in November, after dropping to 85 in October, the lowest reading in more than three years.
In North America, Canada will report October inflation data today.