South Korea’s central bank has issued a report detailing the negative impact rising housing costs have on consumption and welfare, particularly for young adults and those without existing homeownership. The Bank of Korea (BOK) found that increases in housing prices are more likely to depress consumption by encouraging saving and borrowing for home purchases, rather than stimulating spending.
In a report released on , the BOK stated that the positive “wealth effect” of rising house prices – the idea that homeowners feel wealthier and thus spend more – varies significantly by age and housing status. The report highlighted a divergence between long-term housing price increases and a slowdown in household consumption growth.
Analysis of household financial and welfare data since revealed a decline in the average propensity to consume (the proportion of disposable income spent) across all age groups. However, this decline was most pronounced among those aged 25 to 39 who do not own property. The BOK attributes this to a “saving effect,” where younger individuals, lacking substantial assets, prioritize saving for future home purchases.
“When housing prices rise by 1%, consumption changes (the elasticity of consumption with respect to housing prices) have a negative impact of -0.2% to -0.3% for those under 50 years old,” explained Ju Jin-cheol, head of the BOK’s financial modeling team. “For those 50 and over, the value is close to zero and statistically insignificant.” This suggests that rising home prices act as a constraint on consumption for younger generations, while having little impact on the spending of older, wealthier individuals.
The impact of rising housing costs on consumption also differed based on age and housing situation. A model analysis of the impact of a 5% increase in housing prices on household “economic welfare” (changes in consumption expenditure) estimated that welfare decreased by 0.23% for households under 50, while increasing by 0.26% for those 50 and over. A 1% decrease in economic welfare is equivalent to a 1% reduction in consumption.
Even homeowners under the age of 50 experienced a reduction in economic welfare, and reduced consumption. The report attributes this to the “quantity effect,” stemming from the burden of mortgage principal and interest payments. The report notes that younger homeowners are often first-time buyers with relatively low incomes and high loan-to-value ratios, and are more likely to aspire to trade up to more expensive properties. “The investment effect (saving to buy a house) and the quantity effect (reduced spending capacity due to loan burdens) work simultaneously to further depress consumption,” the report stated. Conversely, older adults, with a lower propensity to move to more expensive homes and a higher rate of homeownership, experienced a positive wealth effect.
The BOK report warns that rising housing prices can contribute to a weakening of domestic demand through reduced consumption, and exacerbate structural economic problems such as a declining birth rate due to increased housing costs. The report suggests that the current situation could be contributing to a sense of economic hardship despite wage increases, as noted in a recent report from Chosun Ilbo, which highlighted the financial strain on small business owners and consumers due to rising material costs.
The findings align with broader concerns about the impact of the cost of living crisis on young people globally. A report by the World Economic Forum highlighted that young people are increasingly stressed about their long-term financial futures and day-to-day finances. Similarly, a Bank of America study released in found that 72% of Gen Z (ages 18-28) are taking action to improve their financial health in response to higher living costs. This suggests a widespread trend of financial insecurity among younger generations, driven in part by escalating housing costs.
Recent analysis from Korea also indicates a shift in consumption patterns among those aged 15-29. While spending in this age group was previously higher than the overall average, it has fallen below average when excluding housing costs, suggesting that a significant portion of their income is being allocated to shelter. This reinforces the BOK’s findings that rising housing costs are disproportionately impacting the financial well-being and spending habits of young adults.
