Coverage: weekly note · Information to 19 March 2025
Originally Published as TGB Premium Intelligence
This report was first made available exclusively to TGB Premium subscribers. It is now available as open access as part of TGB's research archive.
TGB Weekly Research Note · 19 March 2025
Household debt fell to 90.8% of GDP by the third quarter of 2024, but the Bank of Korea has made the timing and pace of further cuts depend on household debt staying in check.
The desk view
The household debt-to-GDP ratio published by the Financial Services Commission (FSC) fell from 98.7% in 2021 to 90.8% in the third quarter of 2024. That is progress, but on the Bank of Korea's figures household credit leverage is still above its long-term average since 2002 of 76.0%, and its December 2024 Financial Stability Report said the ratio remains higher than in major countries. The Bank held the Base Rate in August 2024 on financial stability grounds, then cut by 75bp in total between October 2024 and February 2025, pausing in January. Its October 2024 and February 2025 decisions both paired easing with a warning about household debt. Our reading is that the debt ratio is less a barrier to cuts than a governor on their speed, and that Seoul housing is the variable most likely to slow them further.
Deleveraging relative to GDP, not in won
The ratio has fallen in each year of the FSC series, from 98.7% in 2021 to 97.3% in 2022, 93.6% in 2023 and 90.8% in the third quarter of 2024. The Bank of Korea's flow-of-funds measure tells the same story: household credit was 91.1% of nominal GDP at the end of the second quarter of 2024, 2.4 percentage points lower than at the end of 2023. Relative to income the burden also eased, with household debt falling from 151.8% of disposable income at the end of 2023 to 146.7% at the end of the third quarter of 2024.
The Financial Stability Report attributes the fall to nominal GDP growing faster than private credit. Household credit rose by KRW41.8 trillion in 2024, against KRW17.9 trillion in 2023, to stand at KRW1,927.3 trillion at the end of December. On the FSC's all-sector measure, household loans grew by KRW41.6 trillion in 2024 after KRW10.1 trillion in 2023. The FSC said growth accelerated from April as loan rates fell and housing transactions rose in the Seoul metropolitan area, and slowed from September once tighter stressed debt service ratio (DSR) rules took effect. The second phase of those rules, in force from 1 September 2024, raised the additional stress rate used in borrowers' DSR calculations to 0.75%, half the 1.5% base stress rate.
Household debt to GDP, %
Easing paced by household debt
The Bank's December 2024 Financial Stability Report is explicit about the sequence. After housing prices and household debt rose after the second quarter of 2024, mostly in the Seoul metropolitan area, the Bank kept the Base Rate unchanged in August 2024 on financial stability grounds, even though conditions for a cut were appropriate in terms of prices and the real economy. When it did cut, on 11 October 2024, from 3.50% to 3.25%, it cited a slowdown in household debt growth under tighter macroprudential policies, and said it would carefully determine the pace of further cuts.
Bank of Korea Base Rate decisions, October 2024 to February 2025
| Meeting | Decision | Base Rate | Stated rationale |
|---|---|---|---|
| October 2024 | Cut 25bp | 3.25% | Household debt slowing under tighter macroprudential policy |
| November 2024 | Cut 25bp | 3.00% | Growth pressure; household debt slowdown continued |
| January 2025 | Hold | 3.00% | Forecast uncertainty and currency volatility |
| February 2025 | Cut 25bp | 2.75% | Weaker growth outlook; caution on a debt rebound |
Source: Bank of Korea, Monetary Policy Decision and Opening Remarks to the Press Conference (11 October 2024), 11 October 2024; Bank of Korea, Executive Summary for Monetary Policy Report (March 2025), 13 March 2025; Bank of Korea, Monetary Policy Decision and Opening Remarks to the Press Conference (25 February 2025), 25 February 2025.
The November 2024 cut followed increased downward pressure on growth while the slowdown in household debt continued. In January 2025 the Board held at 3.00% as forecast uncertainty and foreign exchange volatility rose. On 25 February 2025 it cut to 2.75%, with all members in favour, as it lowered its 2025 growth forecast to 1.5% from 1.9% in November 2024. The same statement said it was necessary to remain cautious about the possibility of a rebound in household debt following a decline in interest rates.
Seoul housing is the swing factor
The risk the Bank describes is already visible in one segment of the market. In February 2025 the Bank's press-conference opening remarks noted a significant increase in apartment prices in some areas of Seoul, mainly due to the lifting of land transaction permit zones. The FSC reported that all-sector household loans rose KRW4.3 trillion in February 2025 after falling KRW0.9 trillion in January, and cited concerns about a potential rise in house prices in areas of Seoul where housing regulations had been eased.
The minutes of the February 2025 meeting show the Board weighing these risks. One member said the household debt-to-GDP ratio had been on a gradual downward trajectory but that attention was warranted to prevent a balloon effect, in which tighter lending rules push credit to non-bank lenders. The same member described household deleveraging as crucial to stable growth and cautioned against any premature easing of macroprudential policy. The Financial Stability Report had already said that a proper policy mix of monetary and macroprudential policy is crucial.
For banks, this points to a cycle in which mortgage lending capacity is set by DSR rules and FSC growth guidance more than by the policy rate. The FSC has said it will work in 2025 to contain household debt growth within the level of annual economic growth. We expect the Bank to keep cutting only as far as Seoul housing and household lending allow.
What to watch
- 10 April 2025: Bank of Korea preliminary flow of funds for 2024, covering household debt for the full year
- 17 April 2025: next Monetary Policy Board rate decision
- July 2025: the FSC's indicated timing for the third phase of stressed DSR rules, to be confirmed
Primary sources: Financial Services Commission (Korea), Household Loans, December 2024 (press release), 15 January 2025; Bank of Korea, Monetary Policy Decision and Opening Remarks to the Press Conference (25 February 2025), 25 February 2025; Bank of Korea, Executive Summary for Monetary Policy Report (March 2025), 13 March 2025; Bank of Korea, Financial Stability Report (December 2024), English translation, 28 February 2025; Bank of Korea, Monetary Policy Decision and Opening Remarks to the Press Conference (11 October 2024), 11 October 2024; Bank of Korea, Household Credits in Q4 2024 (press release), 18 February 2025; Financial Services Commission (Korea), FSC Announces Plans for Implementing Stressed Debt Service Ratio Rules in H2 2024, 25 June 2024; Financial Services Commission (Korea), Household Loans, February 2025 (press release), 12 March 2025; Bank of Korea, Minutes of the Monetary Policy Board Meeting (February 2025), 18 March 2025; Bank of Korea, Statistics Release Schedule for 2025, 13 December 2024; Bank of Korea, Monetary Policy Board's policy-setting meeting dates for 2025, 31 October 2024.