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South Korea has a big household debt problem. The country's unique rental system may be to blame

Central banks, by and large, have one overarching mandate: to ensure price stability and control inflation in a country. Policymakers in South Korea need to contend with another responsibility: managing high household debt.

References to household debt often, if not always, come up in the Bank of Korea's monetary policy decision.

BOK Governor Rhee Chang Yong said in a speech on Jan. 2 that "there has been some criticism regarding why the Bank of Korea takes household debt into account and appears overly cautious when deciding the Base Rate."

Why then, is household debt so important to the BOK's monetary policy considerations? The short answer: it's too high. The long answer? Much more complicated.

Park Jeongwoo, Nomura's economist for South Korea and Taiwan, told CNBC that the BOK is concerned about the negative long-term impact of higher household debt on growth.

"The BOK thinks [the] higher debt burden has weakened households' spending power. At the same time, strong debt-financed demand for housing resulted in distorted capital allocation across the economy, leading to more allocation of capital to not-productive sectors."

Two factors that contribute to the high amount of debt among households in South Korea is a heavy usage of credit cards, and the unique system of housing in South Korea.

Prospective homeowners can of course, buy their own homes outright, but for those who cannot, they need to rent.

But unlike most rental systems around the world, South Korean renters pay a deposit known as "jeonse" or "key money," instead of a monthly rent, according to Samuel Rhee, co-founder, chairman and group chief investment officer for wealth platform Endowus.

The jeonse is a deposit about 50%-80% of the market value of the property.

Read more on cnbc.com
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