Rising housing prices leads to less consumption in S. Korea than in other countries

The effect on consumption of 1 percentage point rise in housing price

Percentage of homeowning senior citizens on the rise

The effect on consumption of 1 percentage point rise in housing price

Rising housing prices are generally believed to lead to increased consumption. In addition to the increase in available assets and the predicted rise in future income, the collateral value of housing also grows, increasing the means available to homeowners. In economics, this is referred to as the “wealth effect.” But research findings suggest the effect has been so small in South Korea that it may operate in the opposite direction.

This was the position presented by Bank of Korea (BOK) research department official Lee Seung-yoon and research officer Choi Young-woo in a Dec. 6 monthly research and statistics bulletin report titled, “Effects of the Housing Asset Ownership Generational Divide on Consumption.”

Based on data from Statistics Korea surveys on household finances and welfare and Korea Labor Institute labor panel survey data, the report involved an empirical analysis of the effects of rising housing prices on consumption according to the home-owning status and the generational composition of home-owning families. The analysis showed an average increase of 0.02% in consumption by home-owning households for every percentage point increase in housing prices – substantially lower than the 0.04–0.06% rate of increase found in US studies conducted around 2000, or the rates of increase observed in previous South Korean studies around 2010 (0.09–0.11%, 0.02–0.09%).

The report suggested this was the result of the increased percentage of senior citizens among homeowners. In terms of the generational component ratios for South Koreans possessing housing assets, the percentage in their 30s and under fell by 1.4 percentage points from 12.4% in 2013 to 11% in 2017, while the percentage aged 40–59 declined by 3.2 percentage points from 57.4% to 54.2% over the same period. In contrast, the percentage aged 60 and over climbed by 4.6 percentage points from 30.2% to 34.8%. The number of senior citizen households possessing multiple homes also rose by around 60% over the same period from 488,000 to 771,000.

But many seniors have little to no fixed income and feel obliged to pass assets on to their children, which limits their ability to increase consumption even as housing prices rise. Indeed, the report’s analyst showed consumption by heads of household in the 40–59 age range increasing by 0.034% for each percentage point rise in housing prices, compared to just 0.021% for senior citizen heads of household.

Rising housing prices associated with decreased consumption among non-homeowners

The rise in housing prices was also associated with a steep decline in consumption for non-homeowners, who represented 44.1% of all South Koreans as of 2017. Consumption by non-homeowner households was found to decline by an average of 0.246% for each percentage point rise in housing prices. Households in the 40–59 and over-60 age groups showed especially large drops of 0.448% and 0.495%, respectively.

“If we also take into account the fact that rising housing prices lead to decreased consumption for non-homeowner households, the positive effect of rising housing prices on consumption is very small and could even be negative,” said Lee Seung-yoon.

By Lee Soon-hyuk, staff reporter

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