South Korea is grappling with an escalating household debt crisis that has caught the attention of economists and policymakers alike. The Bank of Korea (BOK), the country’s central bank, faces a challenging balancing act as it attempts to manage this pressing financial issue. A significant factor contributing to the problem, experts argue, is South Korea’s unique rental system, “jeonse,” which has created substantial financial burdens for households.
Why Household Debt Is a Major Concern
Household debt in South Korea is alarmingly high, with the debt-to-GDP ratio reaching 91% as of the second quarter of 2024, according to figures from the Bank of International Settlements. By comparison, advanced economies average a ratio of just 68.9%. Data from the International Monetary Fund (IMF) further highlights that South Korea has the highest household debt-to-GDP ratio among Asian countries, surpassing even China and Japan.
The rising debt is not just a statistic—it has serious economic implications. Park Jeongwoo, an economist at Nomura, explained that South Korea’s high household debt weakens consumer spending power and distorts capital allocation across the economy. This over-reliance on debt poses long-term risks to economic growth and stability.
The Role of the Jeonse System in the Debt Crisis
One of the unique contributors to South Korea’s household debt is the “jeonse” system. Unlike traditional rental systems, where tenants pay monthly rent, South Korean renters often pay a large upfront deposit—known as jeonse or “key money”—which can range from 50% to 80% of the property’s market value. At the end of the lease, the deposit is returned to the renter. For landlords, jeonse serves as an interest-free loan that they can invest elsewhere.
While this system may seem advantageous for landlords, it creates significant burdens for tenants. Many renters take out loans to afford the jeonse deposit, adding to the country’s already high levels of household debt. Samuel Rhee, co-founder of Endowus, a wealth management platform, noted that rising interest rates have compounded the issue, making it harder for renters to service their debt.
The situation is further complicated by the fact that banks in South Korea have not passed on the benefits of the BOK’s recent rate cuts to consumers. This means that while the central bank has reduced its base rate to 3%, renters are still struggling with high-interest costs.
The Broader Economic Implications
The household debt crisis has far-reaching consequences for South Korea’s economy. Ryota Abe, an economist at Sumitomo Mitsui Banking Corporation, warned that excessive household debt could trigger a credit crunch, leading to deflationary pressures and a potential economic recession. The debt-to-disposable-income ratio in South Korea stood at a staggering 186% in 2023, up from 130% in 2008. This rapid increase in debt, outpacing wage and GDP growth, underscores the fragile state of the country’s household sector.
If households fail to repay their debts, the resulting shock could ripple through the financial sector, threatening the stability of the entire economy. Abe described this scenario as an “economic catastrophe” that South Korea must work to prevent.
The Bank of Korea’s Dilemma
The BOK faces a difficult task as it navigates this crisis. On the one hand, cutting interest rates could alleviate the debt-servicing burden for households and stimulate the slowing economy. On the other hand, lower rates could weaken the South Korean won, increase imported inflation, and potentially fuel further debt-financed housing demand, exacerbating the problem.
Endowus’ Rhee highlighted this conundrum, noting that lower interest rates could drive up housing prices and rental costs, triggering inflationary pressures. Meanwhile, Alex Holmes of the Economist Intelligence Unit pointed out that household debt as a percentage of GDP declined for the first time in 2024, suggesting that the BOK must tread carefully to avoid reversing this progress.
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