Household consumption is determined by income and assets. People expect their future income to increase as asset value increases, which is turn results in increased consumption. This relation is called wealth effects, or asset effects. One of the most representative assets is housing which accounts for the largest portion of Koreans’ wealth, particurly, in Seoul because of the very high prices in Seoul. Apartment sales index has been increasing steeply in Seoul than in the other regions since the fourth quarter of 2017. Meanwhile, Seoul’s ratio of household consumption to gross regional domestic product has been decreasing since 2006.
The purpose of this study is to analyze the impact of apartment price on household consumption in Seoul. In general, there are two types of data used to measure the wealth effects; aggregated data and micro data. The use of aggregated data has the advantage of using reliable national statistics and measuring dynamic effects while the use of micro data has the advantage of controlling the features of households such as age of householders, the number of household members, and whether or not they own a house. This study used aggregated data as there have been no studies on wealth effects in Seoul and then would like to analyze this effects by using micro data as a follow up study.
We conduct two empirical analyzes: at city level and at county level in Korea. In first analysis, the time range of this study is from 1995 to 2019, and the spatial rage is the 7 cities such as Seoul, Incheon, Daejeon, Daegu, Busan, Ulsan, and Gwangju. Household consumption is the function of apartment prices, income, interest rates, stock prices, population, and the proportion of people aged between 30 and 64. This research uses the dynamic panel model to control the effect of time related observation. The result shows that apartment prices of Korea’s metropolitan cities had a positive effect on household consumption, but the coefficients are not statistically significant. However, as apartment prices increase in Seoul, household consumption would decrease compared to increase in household consumption in other regions.
In second analysis, the time range of this research is from 2010 to 2018, and the spatial range is the 25 counties of Seoul. Household consumption is the function of apartment prices, income, interest rates, stock prices, population, and the proportion of people aged between 30 and 64. As suggested by Mian et al.(2013), we use the car registration as a proxy for regional household consumption which is the dependent variable. Particularly, the variations in durable goods in Seoul were most similar to those of overall household consumption considering the correlation analysis results. We also analyze this empirical model by using dynamic panel model. As a result, apartment prices were a factor in reducing household consumption. The fact that households living in Seoul have a low proportion of home ownership explains as follows; many households would like to reduce their consumption in order to purchase housing in the future. Stock prices and interest rates had a positive and a negative effect on consumption, respectively. In addition, income and population do not influence on household consumption, showing statistial insignificance. When the proportion of people aged between 30 and 64 is high, household consumption in the county region has increased. This result can be interpreted as that they have their children to difficult to reduce their consumption.
This study supports that stabilizing the housing market in Seoul is necessary in terms of household’s economy. Particularly, apartment prices are very high in Seoul and the proportion of home ownership is small. Many home owners would purchase their homes financed by loans, reducing their consumption capacity. In addition, a decrease in household consumption explains that demand for housing purchases is valid in Seoul and neghboring regions. Before the supply expands on a large scale and household loan regulations are eased, policy program could be complementarily designed to increase residential stability for middle classes who considers home ownership as real asset as well as housing welfare.