South Korea’s Ease On Mortgage Rules Causes Increase In Borrowing for Non-Housing Related Spending

You would think that Koreans would have learned from the US housing market crash where eased mortgage lending was a major factor in the crisis and not to replicate the same conditions in Korea.  However, just like in the US it appears political expediency is more important than sound financial judgment:

South Korea recently relaxed restrictions on mortgage lending to jump-start its housing market. While it’s too early to judge the impact, there have been some initial signs that sales are picking up.

The move has also made some economists nervous about already high household debt levels turning critical. South Korea’s household debt has more than doubled over the last decade to almost $1 trillion. The debt-to-disposable-income ratio in South Korea of over 160% is much higher than that of the U.S., Germany, France and the U.K.

Among those worried about the ever increasing amount of borrowing is South Korean lawmaker Park Won-seok of the opposition Justice Party. Mr. Park recently released data from the Financial Supervisory Service showing how Koreans use money they have borrowed in the form of mortgage loans.

Out of the total 67 trillion won ($63 billion) in mortgage loans made during the first seven months of this year, 32 trillion won, or just under half was used for purposes other than home buying.

According to Mr. Park, the pattern of mortgage loan usage is a concern because eased lending rules will encourage Koreans to take on more borrowing for things like living expenses, business costs and education. That will likely make those living on borrowed money even more vulnerable to falling into a debt trap of borrowing to keep repaying debt in an unsustainable way. [Wall Street Journal]

You can read more at the link, but it is pretty amazing that almost half of the mortgages are not even for home purchases.