On July 21 last year, a banner with loan information is hung on the exterior wall of a bank in downtown Seoul.
In recent 10 years, a study has drawn attention with the results of a study showing that the proportion of young household heads with debts that are more than three times their annual income has increased by 2.6 times.
According to the report “Asset status and countermeasures for the future life of young people” (written by Kwak Yoon-kyung and three others) released by the Korea Institute for Health and Social Affairs on the 27th, the debt-to-income ratio (DTI) among young household heads aged 19 to 39 as of 2021 ) of 300% or higher, 21.7% of the cases corresponded to the ‘risk’ index, a 2.6-fold increase from 8.37% in 2012. This is an increase from about 1 in 12 people to about 1 in 4-5 people in about 10 years.
The report targeted young head households who were economically independent from their families.
Among the factors cited as the cause of the increase in youth debt is the investment craze among Korean youth in 2020, the first year of the outbreak of the Corona 19 pandemic. From this time, new terms such as ‘Youngkkul (attracting even the soul)’ or ‘Debt to invest in stocks or real estate even with all available funds’ appeared.
In particular, since real estate prices such as houses were initially high, the debt for housing arrangement accounted for the highest proportion among the debts of young household heads, and the rise in housing prices also led to an increase in youth debt. According to the report, as of 2021, the youth debt holding balance for housing was 58.2 million won, accounting for about 69% of the total youth debt balance of 84.55 million won for the year. Compared to 20.16 million won in 2012, it has increased by 2.9 times in 10 years.
Meanwhile, although it was not included in the analysis period of the report, there is a possibility that the burden of young people with debt will increase in the future as many countries around the world, including Korea, have been maintaining interest rate hikes to control inflation since last year.
Why is youth debt growing so fast?
Experts say that it is a general trend that young people with relatively low incomes often go into debt, and that the ratio of debt to income is high.
In particular, the sharp increase in house prices relative to income over the past 30 years has also had an impact on the increase in youth debt.
Hanyang University’s economics professor Junkyung Ha told BBC Korea, “When the older generation, now in their 50s and 60s, bought a house in the 1990s, they could buy a decent house with three to four or five times their annual income without having to pay much debt. Since the house price relative to (annual) income is about 20 times higher in Seoul, there is no choice but to take on a lot of debt,” he said. “There is a part where debt increases quickly because we have to pay a lot of debt,” he explained.
Regarding this, Mr. A, 61 years old, who lives in Suwon, said, “In the 1980s and 1990s, you and I thought, ‘If you work hard for 10 years, you can buy a house. I found a house,” he said.
In fact, according to the analysis of the report above, it can be seen that the rate of expansion of the total asset size of young households is slower than that of all households, and the share of real assets among total assets is small.
On January 16 last year, citizens are getting sales information at the Polaris Sales Promotion Center in Bukseoul Xi, Gangbuk-gu, Seoul.
According to the report, when comparing the share of real assets of all households and households with young household heads, the share of real assets of all households is generally high, and the gap between the two groups has recently widened. In 2012, the share of real assets of all households and households with young household heads was 56.65% and 42.55%, respectively, with a gap of 14.11 percentage points.
On the other hand, the share of financial assets is relatively higher in households with young household heads compared to all households.
Professor Ha says that the ‘investment craze’ that arose among young people several years ago should also be looked at in connection with the problem of ‘expensive house prices’.
Professor Ha said, “In the case of the current young generation, we have lived through a period when real estate prices continued to rise, that is, a period when house prices continued to be expensive.” “House prices are the cheapest today,” he said.
Professor Ha said, “The reason why young people are struggling with debt can be explained by the so-called Fear Of Missing Out (FOMO) phenomenon, in which ‘you can’t buy a house now or in the future’.” Factors such as “very low” and the mentality that “you are still young so you can continue to do economic activities for a long time” had a compound effect on the increase in youth debt,” he said.
What the rise in youth debt means
Rising youth debt can increase overall social costs.
Being in debt does not in itself mean economic hardship. The report of the Korea Institute for Health and Social Affairs also points out that youth debt needs to be viewed in a complex way, taking into account other factors such as the ambivalence of debt and the discrepancy between income and financial demand according to life cycle.
However, it is also true that risk factors have increased, such as the rapid rise in new youth debt over the past 10 years and the increase in the interest burden of young people on variable-rate loans following the trend of interest rate hikes since last year.
A bank window in downtown Seoul on May 26 last year
Professor Ha said, “Especially, a few years ago, when interest rates were low, financial institutions mainly dealt with floating interest rates, so instead of burdening consumers with risks, they did a lot of business by providing loans at low interest rates.” “Because we have a lot of debt, we take on a lot of interest rate risk,” he explained.
Then, what measures are needed to reduce the overall social risk caused by rising youth debt?
Professor Ha points out that in addition to high house prices and the ‘FOMO’ investment craze, the problem of rising youth debt is attributable to multiple factors, such as the problem that high-quality jobs that young generations are looking for are concentrated in the metropolitan area.
Professor Ha said, “In the case of the young population, there is a strong tendency to concentrate on the metropolitan area for jobs, but the metropolitan area is in a situation where housing costs are much higher.” “We need a complex approach that promotes regional balance, such as building a labor market that provides education and other infrastructure such as education and health care systems,” he said.
Meanwhile, a report by the Korea Institute for Health and Social Affairs suggested that youth asset formation support policy projects, which directly support youth asset formation, need to be supplemented as a solution to youth debt. For example, it was proposed to flexibly extend the length of service among the beneficiary criteria of the support policy for young office workers, or to loosen the criteria to include some of the unemployed and job seekers in the policy support itself.
In addition, when young people move from one area to another, measures to secure continuity of support policies by preparing plans to connect and link projects between local governments and the central government, plans to create a long-term matching youth bank account specializing in housing purchases, and youth to become financial counselors Direct funding support and education plans, such as support for financial planning and debt counseling, were also presented.
