Households Spend Only 130 Won for Every 10,000 Won Earned... 3 Reasons Stock Gains Don’t Boost Consumption

Stock Asset Effect in Korea Only 1.3%, One-Third of Advanced Economies
① Stock assets are small relative to income and concentrated among high-income and wealthy groups
② Gains from stocks are perceived as "temporary phenomena"
③ Profits fr

An analysis has found that the wealth effect of rising domestic stock prices on consumer spending is only 1.3%. In practical terms, for every 10,000 won increase in stock prices, households increase spending by just 130 won. Considering that the wealth effect in advanced economies such as the United States and Europe is around 3 to 4%, the effect of boosting domestic demand in South Korea is relatively limited.

On May 7, the Bank of Korea announced these findings in its report, "BOK Issue Note: Evaluation of the Wealth Effect of Equity Assets in Korea." The report was authored by Minsoo Kim, Deputy Director, Seongyun Chu, Researcher, and Bubjun Kwak, Team Leader, all from the Bank of Korea's Macroeconomic Analysis Team.

The research team estimated the wealth effect of equities in South Korea by analyzing consumption and equity asset data from the Korea Household Financial Welfare Survey household panel. For the period from 2012 to 2024, they found that the wealth effect was at the 1.3% level. This means that for every 10,000 won increase in stock prices, about 130 won was used as a source of consumption.

In advanced economies such as Europe and the United States, about 3 to 4% of capital gains from rising stock prices translate into increased consumption. By comparison, South Korea's equity wealth effect is relatively small. Even Japan's wealth effect stands at 2.2%, higher than South Korea's.

The report cited several reasons for the relatively low wealth effect of equities in South Korea. First, the scale of equity assets is small, and a high proportion is concentrated among high-income and high-wealth households. In fact, as of 2024, the size of equity assets relative to disposable income in South Korea is 77.3%, significantly lower than in the United States (255.6%) or major European countries (183.9%). Moreover, equity assets are concentrated among households with high income (64.5%) and high wealth (73.2%), both of which show relatively low linkage to consumption.

Another factor that appears to have limited the effect on consumption is the historically low expected returns on domestic equities. With low returns and high volatility, even those who make money from stocks tend to see it as a temporary phenomenon rather than a permanent increase in income, leading to limited increases in consumption. In fact, the monthly average expected return on domestic equities from 2011 to 2024 was just 0.09%, only one-sixth the level of the United States, while unexpected volatility was 10% higher. The duration of these returns was also shorter, at about 2.3 months, compared to 3.1 months in the United States.

Investment behavior that prioritizes investing profits from equities into real estate has also limited additional capacity for consumption. In fact, it is estimated that among households without homes, 70% of capital gains from equities were redirected into real estate. The report noted, "The fact that capital gains flow into real estate first is due to the historically lower volatility of the domestic real estate market—one-eighth that of equities—and a return rate twice as high, resulting in a higher opportunity cost of spending."

However, there have been recent changes in conditions affecting the wealth effect. With global demand for artificial intelligence (AI) driving rapid stock price increases, household stock ownership has surged, participation has diversified to include younger and middle- to low-income groups, and expected profits have significantly increased. In 2023, household equity capital gains reached 429 trillion won, 22 times the historical average. Since younger and middle- to low-income groups newly entering the stock market tend to exhibit a relatively greater wealth effect, there is potential for the overall wealth effect in the Korean economy to expand.

On the other hand, the report pointed out that when stock prices fall, the reverse wealth effect is greater, meaning that if the market undergoes a significant correction, the wealth effect could actually decline. The report stated, "With leverage investments such as margin loans on the rise, we must be mindful of the risk that a fall in asset prices and increased debt burdens could simultaneously amplify downward pressure on the economy." It added, "As the link between the stock market and the real economy grows stronger, now is the time to make thorough preparations for potential risks."

In the medium to long term, the report recommended creating a stable investment environment so that the stock market can function as a foundation for household asset building. The report emphasized, "It is necessary to stabilize real estate prices to prevent capital gains from equities from flowing disproportionately into real estate, and to enhance incentives for households to hold stocks over the long term."

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