Households Not Benefiting from Strong Stock Market

In the past, Yeouido, Seoul’s equivalent of the Wall Street, was restless when the stock market was booming. Fancy restaurants and bars were crowded late into the night. Sales of durable consumer goods, including automobiles and high-end home appliances, went up, influencing the overall economy.

However, stock investors these days are not opening their wallets, although there is even talk of a “bubble” as the KOSPI index nears the 2,000 point mark. Various economic indicators do not show the “wealth effect” in which rising value of assets, including stock, accompany increase in consumption.

Only Samsung Card Had an IPO on the KOSPI-

The market capitalization of Korea’s stock markets reached 1072.216 trillion won (the KOSPI represents 965.372 trillion won and the KOSDAQ represents 106.844 trillion won) as of July 16. That is a whopping 679.48 trillion won in growth from 392.736 trillion won in 2003.

It is a well-known economic formula that a booming stock market encourages investors to spend, spreading the effect across the economy. Moreover, corporations increase their investment by raising capital in the stock market, creating a virtuous cycle in the economy.

However, there is no sign of such a wealth effect in the Korean economy. According to the Ministry of Commerce, Industry and Energy, sales of department stores in May decreased 0.1 percent compared with the same period last year. That is a two-month consecutive drop after a 2.3 percent decline in April.

Kim Dae-soo, a menswear and sportswear team leader at Lotte Department Store, said, “Men’s suit sales declined seven to eight percent from last year. While the stock market is strong, retailers feel that the economic cycle is at the bottom.”

Kim Jong-seok, director of the Korea Economic Research Institute, explains, “The wealth effect is being offset by excessive household debts, increasing fixed expenditures, including taxes and educational and oil expenses, and the dampening motivation of corporate investment.”

Kim Hak-gyun, a researcher at Korea Investment and Securities, said, “Although the fund investors has been on the increase since 2005, directly investing individuals kept selling in the stock market until last year. The main beneficiaries of the strong stock market are foreigners who have been purchasing stocks since 2003, and corporations who focused on buybacks to protect their management control.”

The corporate sector is another reason.

Publicly traded corporations’ buyback amounts reached 6.562 trillion won last year and 4.8188 trillion won this year. Listed companies whose fiscal year ends in December gave their investors 12.4167 trillion won in the form of dividends.

Meanwhile, only Samsung Card had an IPO in the KOSPI market this year. This means that the stock market, in which corporations raise capital, is siphoning off capital from corporations instead.

Job Creation and Reduction of Fixed Expenditure Are the Key-

Kim, a 40-year-old assistant general manager at a commercial bank, and Shin, a 39-year-old pharmacist, are a high-income couple with eight million won in average after-tax monthly income. They also made an almost 10-million-won return this year from their 20-million-won stock investment late last year.

However, they cut down their monthly consumption by 500,000 won. That is because of the burden of interests on the 420-million-won mortgage loan that they extended to buy an apartment in the reconstruction area of Gangnam, Seoul.

They currently pay about 2.7 million won a month in interest. But as it was an adjustable-rate loan, the amount is rising every month. They also spend about three million won every month for the private education of their children.

According to the National Statistical Office, the proportion of fixed expenditures, which include taxes and national pensions, insurance premiums and loan interests, went up to 33.4 percent in the first quarter of this year from 22.1 percent in 1991.

The recent interest hike is also pressuring many households. As of the end of May, mortgage loans amounted to 279.2 trillion won. A one-percentage point rise in the interest rate leads to a 2.6 trillion won increase annually in interest.

The burden of private education expenses is also huge. The expenses stood at 345,000 won or 14.1 percent of 2.446 million won, which was the average monthly consumption expenditure of urban working households in the first quarter. That is the highest proportion since the National Statistical Office began its survey on educational expenses in 1974.

Real estate-related taxes also grew about 1.5 trillion from last year to six trillion won. The high oil price, which rose more than 20 percent from the beginning of this year, is also putting pressure on household budgets.

The high-income class, which does not have debts and benefited from the rising stock index, is increasing their spending overseas, rather than at home. Overseas consumption in the first quarter reached 4.7 trillion won, exceeding the sales of department stores (4.5 trillion won) for the first time ever.

Park Jong-gyu, a senior researcher at the Korea Institute of Finance, analyzed, “The wealth effect accompanying the robust performance of the stock market can fully materialize only when jobs are created en masse and various fixed expenditures of households are reduced.”