This study analyzes the relation between the rise in household debt and household characteristics such as income and assets using microdata on households. Based on the findings, implications are presented for the management of Korean households’ financial soundness and of the relevance of household debt to economic inequality.

The growth in household debt since the early 2000s is significantly associated with income and assets. On the one hand, in terms of income, bottom-income households have increased their debt relative to income by a big margin, possibly posing a threat to financial soundness. In addition, the rise in household debt is positively correlated with income growth, suggesting that the recent slowdown in debt growth is linked not only to the policies of tightening housing finance regulations, but also to the reduced income growth stemming from the macroeconomic slowdown. On the other hand, in terms of assets, households with larger assets exhibit a higher increase in their debt-to-income ratio compared to other households. The increase in household debt is positively correlated with the growth in real estate assets, which can be understood to mean that the increase in real estate assets is closely tied to the increase in household debt during the period in question. However, if the growth in real estate assets had been driven by temporary factors, it would be possible for the risk of debt default to increase as the real estate market would adjust.

The relevance between income growth and debt growth and between the growth in real estate assets and debt growth is stronger among households in the lower income quintile. This may be due in part to the increase in lifetime income, but considering the restrictions on their access to the financial market, the increase in income and real estate assets seems to have acted to mitigate those borrowing constraints. Meanwhile, in terms of real estate asset quintile, households in the middle and upper groups were found to take on more debt when their real estate assets grow, meaning that the interaction between asset growth and debt growth appears much stronger in the middle and upper groups.

According to the relative income hypothesis, it is expected that the larger the income inequality, the higher the increase in debt, particularly among low-income households. This study analyzes microdata on households to examine whether the increase in household debt is actually related to the economic inequality during the period since the early 2000s. When the data is compared by region, the analysis reveals no significant relevance between income inequality and the debt growth of low-income households in the same region. Also, there is no meaningful relevance between the inequality in household asset and debt growth in bottom-asset households. On the other hand, when the comparison is based on age group (nationwide), the analysis finds that low-income households of the same age group react to the income inequality within the group and respond by taking on more loans.

The recent slowdown in debt growth seems to be associated with the slowing growth in GDP as well as with the tighter mortgage regulations. But, as long as the real estate market is thriving, more debt may follow. Furthermore, the income gap within similar age groups may also likely drive up the debt in low-income households within the age groups. Accordingly, to induce a soft landing for household debt, the government should seek policy measures to stabilize the real estate market and to reduce the consumption gap stemming from income inequality in addition to tightening borrowing regulations.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Literature Review and Key Features of the Study

Chapter 3 Background and Discussions on Household Debt Growth
　Section 1 Discussions on the Background of Household Debt Growth
　Section 2 Relevance Between Household Debt Growth and Income/Assets

Chapter 4 Methodology and Data
　Section 1 Analytical Methodology
　Section 2 Data Used for Analysis

Chapter 5 Descriptive Analysis of the Data

Chapter 6 Analysis of the Relationship Between Debt Growth and Income/Assets
　Section 1 Baseline Model Analysis and Robustness Checks
　Section 2 Analysis by Income and Real Estate Asset Quintiles
　Section 3 Analysis of Debt Growth and Economic Inequality

Chapter 7 Conclusion

References

ABSTRACT