Korea, Even with Soaring House Prices and Stocks... Money Is Not Being Spent

Buying homes with 'all-in loans,' rising house prices increase burden on jeonse tenants

Consumption stimulus does not follow

Stock market disconnected from domestic economy

Asset price surge has minimal positive impact on economic recovery

[Asia Economy, Reporter Kim Eun-byeol] The so-called "wealth effect," where rising asset prices such as stocks and real estate lead to increased consumption and thus revive the real economy, appears not to work properly in South Korea. This is analyzed to be because many people buy homes by taking out "all-in" loans (borrowing to the limit), which often does not translate into consumption stimulus, and because rising house prices increase the burden on citizens living under the jeonse (long-term lease) system. Additionally, stock price increases are centered on manufacturing and export companies, showing weak correlation with the domestic economy. The positive impact of asset prices on economic recovery is ultimately minimal, highlighting the need for active debt management.

According to the National Assembly Budget Office's (NABO) analysis titled "International Comparison of the Impact of Asset Price Changes on Private Consumption" on the 29th, South Korea's stock prices rose 51.5% this year compared to the end of 2007, and house prices increased by 34.5% during the same period. The problem is that private consumption growth remained sluggish while asset prices rose. South Korea's annual private consumption growth rate, which was 5.3% in 2007, plummeted to 0.2% in 2009 right after the financial crisis, then rebounded to 4.4% the following year. Since then, the growth rate remained sluggish, showing 3.2% in 2018. Even last year, when COVID-19 occurred and liquidity was significantly injected, driving up stock and house prices, it did not lead to increased private consumption.

However, the link between asset price increases and consumption was confirmed in other countries. The U.S. stock market doubled compared to the end of 2007, and stock prices in Japan (79.3%) and Germany (70.1%) also showed sharp rises. House prices in Germany (68.2%), Australia (59.6%), and the U.S. (29.6%) also showed upward trends. NABO analyzed that after the financial crisis, countries like Germany and the U.K. saw private consumption increase alongside rising house prices. Although the influence has diminished compared to before the financial crisis, there was a tendency for consumption to increase when house prices rose.

NABO explained, "The background is that after the crisis, liquidity was injected, causing asset price increases that were disconnected from the real economy." In contrast, in South Korea, the asset effect of real estate prices was not significant in analyses conducted both before and after the financial crisis. The asset effect of domestic stocks was also not clearly observed. NABO stated, "It is necessary to review the characteristics of the domestic real estate market, such as rental systems and housing ownership by generation, and conduct in-depth analysis considering investor trading and holding characteristics in the stock market."

Recently, the Bank of Korea also pointed out that the Korean stock market does not properly represent the real economy. In its study "Analysis of the Real Economy Representation of the Korean Stock Market," the Bank of Korea stated, "The domestic stock market well represents the added value of manufacturing, but relatively poorly reflects the added value of the entire industry and service sectors." This supports the phenomenon where stock prices rise due to the strong performance of export giants like Samsung Electronics but do not lead to employment or consumption stimulus.

Meanwhile, concerns are growing as the ultra-low interest rate environment continues, leading many young people to increase debt for investment purposes. Household debt in the first quarter of this year reached 1,765 trillion won, up 9.5% compared to the same period last year. While the average annual income of Korean households increased by 8.6% from 62.92 million won in 2017 to 68.35 million won in 2020, financial debt rose by 18.1% from 88.78 million won to 104.84 million won during the same period. The debt-to-income ratio increased most sharply among households in their 30s and 40s. President Moon Jae-in urged at the expanded economic ministers' meeting held at the Blue House the day before, "We must establish measures to stably manage household debt in preparation for the possibility of rising market interest rates in the future."

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