Even as House Prices Rise, Overall Consumption Barely Increases... Only Young Multi-Homeowners Show Increased Spending

Bank of Korea Economic Research Institute 'BOK Economic Research'

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] In Korea, the increase in consumption when house prices rise is smaller compared to overseas countries such as the UK. On the other hand, consumption contracts more significantly when house prices fall than when they rise. Homeowners reacted more sensitively to house price declines than non-homeowners.

According to the recent 'BOK Economic Research' published by the Bank of Korea Economic Research Institute on the 7th, the elasticity of household consumption to housing price changes, based on all households, was estimated at 0.194. This means that when real housing prices increase by 1%, household consumption increases by 0.194%. Compared to a similar study conducted in the UK (0.651), the impact of consumption increase due to rising house prices was about one-third of that level.

Although real estate prices are soaring in Korea, it is interpreted that it is difficult to see real estate prices as positively affecting the economy through consumption compared to overseas.

On the other hand, the impact when house prices fall was significant. According to a survey targeting homeowners, households that own homes reduced consumption by 0.552% when house prices fell. Meanwhile, the impact when house prices rose was only 0.151. Seungyun Lee, a senior researcher at the Bank of Korea Economic Research Institute, explained, "This is because homeowners react more strongly to losses than to capital gains of the same size."

An interesting point is that households without homes actually increased consumption when house prices fell. When house prices fell, homeowners reduced consumption by 0.257%, whereas non-owners increased it by 0.28%. Homeowners reduced consumption when house prices fell, considering the burden of interest costs, but households that do not yet own homes followed the pattern of 'house price decline → reduced required savings → expanded consumption.'

Consumption responses also varied greatly depending on multi-home ownership and age according to house price movements. When the Bank of Korea divided the survey into youth, middle-aged, and older adults, it was analyzed that young homeowners increased consumption by 0.702% when house prices rose. In contrast, middle-aged and older adults increased consumption by only 0.2%, similar to the average. It is analyzed that as people age, they often have no income other than real estate, so even if house prices rise, it does not significantly affect consumption.

The Bank of Korea has been closely monitoring real estate prices at every recent base interest rate decision. Members of the Monetary Policy Committee have expressed concerns that the low interest rate and low inflation environment might lead to a sharp rise in the real estate market. Currently, housing assets in Korea account for about 70% of total household assets, and consumption accounts for about half of the gross domestic product (GDP).

This report analyzed changes in housing prices and household consumption using Korean Labor Panel data from 2011 to 2017. Unlike previous studies, it is characterized by separating homeowner and non-owner households and analyzing the asymmetrical effects of price increases and decreases.

This content was produced with the assistance of AI translation services.