Why it matters
Moderate household credit supports home buying and consumption, but BIS research suggests that beyond roughly 60-80% of GDP household debt starts to weigh on growth. IMF work finds that rising household debt raises consumption and growth in the short run but lowers growth and raises crisis risk three to five years later.
Channels to crisis
- Debt service and consumption: higher rates or lower income force sharp cuts in spending.
- Asset prices: falling house prices trigger deleveraging.
- Lender losses: arrears and lower collateral values impair banks and tighten credit.
Irving Fisher's debt deflation and Hyman Minsky's financial instability hypothesis describe this spiral; the 2008 US subprime crisis is the classic case.
Macroprudential tools
- LTV: loan limit relative to property value
- DTI: mortgage payments and other interest relative to income
- DSR: payments on all loans relative to income
Countercyclical capital buffers and a shift to fixed-rate, amortising loans are also used.
Korea
Korea's household debt is high relative to GDP among major economies and largely variable-rate, making households sensitive to interest rates. The Bank of Korea treats it as a core risk in its Financial Stability Report, and the government has gradually extended borrower-level DSR limits.
References
- Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). The Real Effects of Debt (BIS Working Paper No. 352). Bank for International Settlements.
- International Monetary Fund. (2017). Household debt and financial stability. In Global Financial Stability Report, October 2017 (Chapter 2). IMF.
- Mian, A., & Sufi, A. (2014). House of Debt. University of Chicago Press.
- Fisher, I. (1933). The debt-deflation theory of great depressions. Econometrica, 1(4), 337-357.