r/business • u/WannoHacker • 21d ago
South Korea becomes first major Asian economy to raise interest rates
https://www.bbc.co.uk/news/business-5833826136
u/in4ser 20d ago
They have the highest household debt in Asia at 190.6% debt to household income. This isn’t going to be popular with S. Koreans at all.
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u/LoadErRor1983 20d ago
Which country would welcome interest rate increases at this point?
I would love it from the purchasing power perspective but know that 60% of my friends (and probably country) would have a hard time maintaining their debt.
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u/VanaTallinn 20d ago
Any country where mortgages are usually fixed interest rates, like France?
Rate increase would probably slow down the increase of value of assets or even push them down a bit, but it would likely go with increases in salaries, while my mortgage stays the same. So yeah why not.
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u/LoadErRor1983 20d ago
That could be the case in France, if you truly believe that your salaries would increase with interest rates (not sure if that's due to union bargaining?).
Having said that, even when the mortgages are fixed it's not like all of the mortgages in the country are on the same cycle. Some mortgages will have to be renewed tomorrow, others in a month and so on.
US has about 9.2% of people in variable, which means that 90.8% of people are in a fixed mortgage situation, which would probably be very close to Canadian landscape as well.
As for your "Yeah, why not?" comment, I don't think you have thought through how the cost of living will change when everyone gets dinged and if things start going south. Not sure salary raises will help you in inflation and/or recession, provided you still have a job.
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u/VanaTallinn 20d ago
Can you explain what you mean by loan « cycle »? I am not familiar with that.
I agree I don’t have much knowledge of economics, but I know we used to have much higher interest rates, and life was cheaper back then. Especially because real estate was cheaper.
I am genuinely interested in how a rate increase can impact our lives. But I don’t think a change between the current almost zero or negative rates and something like 2% will make much difference.
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u/LoadErRor1983 19d ago
This is what I mean by loan/mortgage cycle.
Let's assume you sign a fixed term 10 year rate. That means that you don't have to worry for the next 10 years what the market rate will do and you know what your payments will be.
However, your neighbor got his 10 year mortgage 9.5 years ago. He is due for renewal in 6 months and it will be really important for him to get the lowest interest rate, but the rates are increasing. Now take that and apply it the whole country and there are always mortgages that are being signed/renewed.
To be fair, in the above scenario your neighbor is going to get a good deal now considering that his rate from 10 years was probably 5%+. Where the problem starts compounding is 10 years from now (assuming they are all 10 year mortgages). Scenario where you just bought your really nice and expensive house because low interest rate allowed you to. But 10 years from now that rate might go from 1% now to 5%. Even though that seems like a small difference, your cost of borrowing went up 400%. Even from 1% to 2% it's 100% increase in your cost of borrowing.
For those that barely can afford to carry their mortgages right now because they paid so much for their expensive real estate, and are maxed out at this point, those kind of changes in the interest rate will be crippling.
Also, it will not only affect mortgages but credit lines and any form of revolving credit for businesses that are used in day to day operations. With current situation regarding Covid, a lot of businesses are maxing out their credit to keep their doors open. Slight change in interest rate could make them close for good. At that point you have mass layoffs and so on.
I don't want to pain too grim of a picture because we could end up in a lost decade like Japan did in the past and have these low rates forever.
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u/VanaTallinn 19d ago
Okay I think I understand. You guys have « partial » mortgages where you do not repay the principal entirely during the contracted duration of the loan, right?
I have never seen or heard of these here in France. There is just no such thing. Mortgages are 20 to 30-year long because they consist in the repayment of principal + interests in full. When the plan reached its final repayment, there is nothing left. You own the asset and you are not left with any debt at all, you are free. So you do not care if interest rates went up - except for the impact it can have on your asset price. At worst it made it more expensive for you, but you basically cannot loose.
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u/LoadErRor1983 19d ago
Sorry, maybe I wasn't clear. Mortgages here have different terms (1 year, 2 year, 5, 10) but they have the same amortizations as you guys do in France (25-30 years).
So you "lock-in" your interest rate during the term and then renegotiate it when the term is up. This allows you to port mortgage to a different lender, extend/shorten the amortization periods, etc.
Am I understanding you correctly that your mortgage term is 30 years and your interest rate does not change?
What I can find online tells me mortgage market in France is very similar to US/Canadian market in the way it's done, but I may be missing something (or you are). That last sentence below tells me interest rates are very much at play and you may end up never owning/paying off the property if interest rates blow up.
Fixed-rate and variable-rate French mortgages
Borrowers can also choose between fixed-rate and variable-rate mortgages. Fixed-rate mortgages are often set at a higher rate, but do offer security.
One interesting fixed-rate mortgage product is a flexible mortgage. This product provides the security of a fixed interest rate, but allows borrowers to vary their monthly payments based on their individual circumstances.
Typically, the lender sets upper and lower payment limits, but in some cases payments can be suspended for up to two years, or increased as much as 30% for a more rapid payoff.
Rates for these features can be higher. Opt for them if you think you’ll definitely use them.
Variable-rate mortgages in France hinge upon the three month or one year Euribor rates plus a 1–3% margin, so it can be difficult to get a transparent picture of long-term rates.
A popular variation on the variable-rate mortgage is the prêt à taux révisable non cape mais à échéances plafonnées. This product has a completely variable rate, but the borrower’s payments have an upper bound.
Though it is unlikely, it is possible that the borrower may inadvertently end up with an interest-only mortgage if the rates increase substantially.
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u/VanaTallinn 19d ago
Exactly right. We get 30-year fixed rate loans. No change whatsoever.
I personally signed some 20-year ones so I have been through the process.
Yes variable rate (EURIBOR+x%) do exist but they basically disappeared in practice at least since the last decade, maybe more, as the rates kept falling and people just wanted to lock in a cheap rate.
It gets even better because usually if rates go down you can just ask your bank for a revision and they will get a bit closer to the market rate. So this way you still enjoy lowering the rate while preserving the guarantee of it never going up. Or you can have it bought by another lender that would offer a better price. I actually did both of these in a row to get the rate as low as I could.
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u/anewpath123 20d ago
Does this generally include mortgages? If so that doesn't feel too bad
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u/curiousgeorgeasks 20d ago
http://english.hani.co.kr/arti/english_edition/e_business/962114.html
Subprime mortgage loans the main culprit behind 2007-2008 financial crisis
A case in point in the financial crisis that erupted in 2007-2008, triggered by subprime mortgage loans. After passing the 85% mark in 2004, the ratio of household debt to GDP in the US had continued to increase, reaching 98% at the crisis’s peak in 2008. Only after that financial crisis had hit did the process of “deleveraging” begin. The ratio fell below the 90% mark as of 2011; by 2014, it was down below 80%. It was an intensely painful process that saw many people driven out of their homes as they were seized by creditors.
Financial authorities recognize the seriousness of the household debt issue, but insist that South Korea is “relatively safe” because the increase in debt has been centered mainly on people with high incomes and strong credit. But apartment prices in the Seoul Capital Area (SCA) have recently reached levels high enough to create a burden even on high-income, high-credit demographics. This means more people who would find themselves drowning in debt if an unexpected shock comes along from within or outside to send housing prices plummeting and interest rates rising.
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u/anewpath123 20d ago
This... Doesn't answer my question...? I asked if the 190% included mortgages?
Edit: it also doesn't illustrate the point you're trying to make btw. The snip you sent references household debt to GDP. Not household debt to income.
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u/Schtekarn 20d ago
It includes mortgages. Which imo isn’t a crazy rate. Me personally is levered up to like 500% my yearly income. But I guess as a cut of the whole working population it’s pretty high.
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u/curiousgeorgeasks 20d ago
I'm not first commenter. I was making the point that mortgages are the majority of household debt.
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u/KeineG 20d ago
So it begins...
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u/eigenman 20d ago
Tomorrow Jay Powell: LMAO!
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u/wienercat 20d ago
You might joke, but often times all it takes is one to start the domino effect. Now other countries don't have to be the first.
The optics of being "first" to do something generally regarded as bad by financial markets is often what stops many businesses and governments from doing things
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u/awokemango 20d ago
Wait until this comes to the West. The bankruptcies this will bring will be staggering.
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u/HelloJoeyJoeJoe 20d ago
Can you share more details on why? Are most loans in Korea based on adjustable rates?
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u/illegible 20d ago
I suspect he's talking about US companies having become too reliant on low interest rates.
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u/El_Seven 20d ago
I had to check and make sure I was in a business sub. It should not be new news to business folks that companies that benefit from low interest rates will fare less well in a rising rate environment. That said, companies that do better in rising rate markets will benefit (e.g. regional banks that are reliant on net interest margin).
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u/eigenman 20d ago
Not just companies. Individuals.
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u/illegible 20d ago
True
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u/wienercat 20d ago
Most individuals only interact with interest rates from credit cards and loans. Not really a means of staying solvent or laying out significant amounts of debt for new things like expanding into new states. So yeah individuals will feel it, but it will be more the indirect impact of companies getting fucked.
Interest rate increases or decreases change the prime rate. Which will effect adjustable rate mortgages (ARM), adjustable rate loans, and credit cards.
Credit cards are already disgustingly high in interest, so that will hurt a lot. But realistically, credit card rates have been pretty predatory for years now. My parents used to bitch about 7%-8% credit interest rates, now you have to try to find cards with 10%-12%.
But if you have a fixed rate mortgage or loan for example? You can laugh all you want as interest rates spike, your rate won't move. This is why you never get adjustable rate loans unless it's absolutely necessary. You are getting a lower rate to gamble that interest rates will remain low.
Before 2008 ARM's became popular because interest rates were steady and low. People with less than stellar credit could get an ARM to buy a home easier than a fixed rate mortgage.
Then the housing collapse and interest rates skyrocketed, which compounded the leveraging of the markets and people just walked away from the mortgages that now had 10%+ interest rates. Who wouldn't? At that point, bankruptcy only stays on a credit report for 7 years, stop paying your mortgage and make the bank evict you. While you are not making payments setup to move into a rental or somewhere else, then leave before they come and knock on the door.
Interest rate increases are an inevitability. It's really one of the few tools that governments have to combat markets getting too hot, or to combat soaring inflation.
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u/ImpressoDigitais 20d ago
If interest rate simply return to 2017 levels, CNBC will be screaming about hyperinflation.
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u/BabySealOfDoom 20d ago edited 20d ago
Tbh their credit card rates are only like 2-3%
Edit: I am correct.
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u/mufasa_j 20d ago
I used to work for credit card company in south korea. This is not true.
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u/BabySealOfDoom 20d ago
“The average value for South Korea during that period was 6.53 percent with a minimum of 3.37 percent in 2016 and a maximum of 15.28 percent in 1998. The latest value from 2019 is 3.45 percent.” from here And also I was using my own experience. Still miles better than the 28% credit cards in the US. My lowest is 14%. So I wasn’t really wrong…. Ass hat.
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u/Vast_Cricket 20d ago
There will be more imo.
"The move is aimed at helping curb the country's household debt and home prices, which soared in recent months. Central banks around the world are trying to balance the impact of ongoing Covid-19 infections against economic risks such as high inflation. It is the first time the Bank of Korea has raised its main interest rate for almost three years."