Over 1/3 of Korean Households Labor Under Interest Payments

The interest commercial banks charge on housing and credit loans have surpassed seven percent, the highest level in 13 years.

Interest rates are expected to rise further as the Bank of Korea battles inflation, raising concerns that the heavy financial burden for households will cripple private consumption.

The U.S. Federal Reserve is highly likely to hike the key interest rate by 0.75 percentage point next month, prompting the BOK to follow suit to stay ahead of the curve and prevent a further collapse of the won. Analysts expect interest rates on household loans to rise above eight percent by the end of this year.

A study by the Hyundai Research Institute shows the proportion of households saddled with loan interest payments rose from 31.8 percent in the first half of 2020 to 35.7 percent in the first half of this year. Rising payment obligations in the absence of a significant increase in wages leads to a decline in private consumption.

The average proportion of wages cash-strapped households spent on consumption already fell 5.9 percentage points from 72.5 percent to 66.6 percent over the same period, compared to a decline of just three percentage points among households not burdened by interest payments.

"From a long-term perspective, efforts must be made to achieve an economic recovery and stabilize the job market so that private consumption sentiment improves," the think tank said.

If highly leveraged homeowners default on their housing loans, others could feel the impact. "If a tenant of a home owned by a highly-leverage owner fails to receive their deposit, they won't be able to pay the deposit for their new rental home and the owner of that house won't be able to repay his tenant, resulting in a chain reaction," the institute added.