Korea’s Mortgage Rates 30-Month High; Concerns over Consumption Slowdown and Household Debts

As noted, Korea’s domestic consumption base has not been that strong to begin with. The Korean government is trying to spur the domestic consumption by introducing several measures as its global export markets falter. And yet, if one understands the fundamentals of the Korean economy and macroeconomic outlook, s/he would know that it is highly unlikely that Korea’s domestic consumption would be boosted anytime soon.

From Yonhap:

South Korean mortgage rates have soared to a near 30-month high due to the central bank's rate hike, sources said Sunday, raising concern that an increase in household interest costs could dampen consumer spending.

Following a two-month freeze, the Bank of Korea on June 10 hiked the benchmark seven-day repo rate by a quarter percentage point to 3.25 percent for this month in an effort to tame persistent inflationary pressure.

According to the sources, top lender Kookmin Bank announced its interest rates on home-backed loans will range from 5.27 percent to 6.57 percent this week, up 0.10 percentage point from the previous week.

The mortgage rates represent the highest level since early January 2009, the sources said.

Analysts said rising mortgage rates will increase households' interest burdens and thus spark a slowdown in their consumption.

"An increase in household interest burdens is expected to put a crimp in household spending," said Kim Chang-base, a senior researcher at the Korea Economic Research Institute. "It could spark a vicious circle of weaker corporate sales, decreased employment, worsened household debt repayment ability and a rise in bad loans."

The mortgage rate increase comes amid growing worries over the level of household debts.

According to a recent BOK report, financial debt held by individuals reached 949 trillion won (US$873 billion) as of end-March, up 11.7 trillion won from three months earlier. But if non-interest bearing debt is taken into account, their financial debt reached 1,006.6 trillion won, marking the first time that such debt has topped the 1,000 trillion won mark.

http://english.yonhapnews.co.kr/business/2011/06/19/39/0503000000AEN20110619000300320F.HTML