South Korea’s youth debt frenzy shows no signs of abating as rate hike looms

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SEOUL (Reuters) – When South Korea announced new credit restrictions last month, Joe Park, a 34-year-old grocery chain purchasing manager, was quick to borrow more money before the more stringent rules do not take effect.

FILE PHOTO: Women wearing masks walk through a shopping district amid the coronavirus disease (COVID-19) pandemic in Seoul, South Korea, July 9, 2021. REUTERS / Heo Ran

After his loan broker said no, he looked for alternative financing, including much more expensive credit card options, knowing that such loans would leave him with less money for food and savings.

A debt frenzy fueled by young Koreans like Park desperate to invest is one of the trends worrying the country’s central bank, which could achieve its first interest rate hike in three years on Thursday.

“It is extremely unfair that they are lowering loan limits now. My credit rating is perfect and I’m prepared to pay more interest if the key rates go up, ”said Park, who says he’s never been behind on his bills since he started working there. five years. “So why cut back on loans? Am I in a socialist country?

Of particular concern to policymakers is the fact that recent restrictions appear to have had little immediate impact on such borrowing.

Bank lending to households for mortgages, stocks and living expenses increased by 168.6 trillion won from the previous year to a record 1,805.9 trillion won (1.54 trillion won dollars) during the June quarter, roughly the equivalent of the country’s GDP and the largest annual increase since the creation of the central bank. publish relevant data in 2003.

Even after the government imposed new limits on bank lending in July, household lending increased by 97 trillion won last month alone, more than the 6.3 trillion won in June before entry into force. force of the new rules.

Many millennials like Park have resorted to “bittoo,” a Korean slang for borrowing to invest, as the only way out of richer baby boomer parents, after seeing President Moon Jae-in’s policies aimed at making money. cheaper housing fail over and over again.

Park withdrew 120 million won ($ 102,263.43) from his overdrawn account to trade stocks, but his frustration at being left out of one of the world’s hottest real estate markets turned to desperation.

DESPERATE TIME

Analysts say the debt surge shows no signs of slowing down, even after local lending rates started on their upward trajectory a few weeks ago and policymakers signaled higher rates.

The risks among young Koreans have been accumulating for some time.

Those under 40 bought 272,638 apartments in 2020, a jump of almost 77% from the previous year, surpassing the increases of 64% and 63% seen respectively among people in their 40s and 50s.

People in their 30s are highly at risk as the most indebted relative to their income, with total borrowing amounting to around 270% of their annual income, according to central bank data.

Loan brokers say more clients are turning to high-cost lenders, which will eventually worsen household finances and affect private consumption, which makes up about half of the economy.

“As banks cut back on lending, those in need of money will look for other ways,” said Kong Dong-rak, economist at Daishin Securities. “Some will turn to their parents, then expensive lenders to get around the restrictions and end up with greater risk.”

Failed to quell real estate speculation after dozens of tax cuts and separate loans, the government last month urged the public to end its debt frenzy.

The Financial Services Commission (FSC) further tightened in July the maximum amount of bank loans individuals can take out relative to their income to 40%, and promised to tighten limits further as debt threatens financial stability.

Local banks are significantly reducing loans.

The Nonghyup Bank, popular with working class and farmers, suspended mortgages and loans for rent deposits last week. Woori Bank also said it had stopped approving mortgages until the end of September, while Kakao Bank was among those considering lending restrictions, the banks told Reuters.

All that seems to have done is push borrowers to more expensive lenders who are not bound by the same restrictions.

“A lot of my clients with the highest credit scores are going to take credit card loans because I had to turn them down,” said one loan broker who agreed to be identified only by name from the Lee family to Standard Chartered Bank Korea.

In July, Bank of Korea Governor Lee Ju-yeol said most of the bank’s board agreed it was time to make financial imbalances a priority and that adjustment policies could help curb betting in the real estate market.

Last week, new FSC chief Koh Seung-beom pledged to take action and said household debt management was his top priority.

For Park, it’s ironic that stricter lending standards make things less affordable.

“I want to borrow more because everything has gone up, be it rents, inventory, but not my pay. I do not understand why the government does not understand this.

($ 1 = 1,169,6800 earned)

Reporting by Cynthia Kim, Joori Roh; Editing by Sam Holmes

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