Stock Prices Rise, Consumption Stagnates: Korea's Weak Wealth Effect

The 'wealth effect' in South Korea's stock market has been found to be significantly lower than in other developed countries. According to Bank of Korea analysis, only about 130 won of every 10,000 won increase in stock prices translated into consumption. Despite the KOSPI index surpassing the 7,000 mark, the impact of stock price increases on actual economic revitalization remained weak. This low wealth effect is analyzed as a result of a narrow base of household stock investment, coupled with low returns and high volatility in the domestic stock market. As of 2024, the ratio of stock assets to disposable income in Korea (77%) was lower compared to the U.S. (256%) and Europe (184%). Furthermore, the average monthly expected return for the KOSPI between 2011 and 2024 was 0.09%, lower than the U.S. S&P 500 (0.53%), and its volatility was higher.

In terms of investment behavior, a structure where stock investment gains are first channeled into real estate rather than consumption limited spending expansion. For households without property ownership, an estimated 70% of stock capital gains were observed to flow into real estate.

The possibility of an expanding wealth effect has recently emerged due to stock price increases and a widening investment participation base. Analyses suggest that as household stock holdings grow and investment participation spreads to younger generations and middle-to-low-income groups, the ripple effect on consumption could become larger. Last year, household stock capital gains increased 22-fold compared to the past average, with wealth effects showing a relatively larger trend among new investors.

However, the concern that a negative wealth effect could be more pronounced if stock prices experience a sharp correction poses a challenge. There are worries that in a leveraged investment environment, including recently increased margin trading, a simultaneous decline in asset prices and an increase in debt burden could heighten downward pressure on the economy.

Consequently, creating a stable investment environment is crucial for the stock market to function as a foundation for overall household asset formation. Policy efforts are needed to prevent stock capital gains from being concentrated in real estate and to incentivize long-term stock holding by households, thereby ensuring that corporate economic performance translates into expanded household asset accumulation and consumption capacity.