Excess savings fuel fears of financial market overheating in Korea

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South Korean households amassed excess savings surpassing 100 trillion won ($78.06 billion) during the Covid-19 pandemic, and a significant portion of these funds, rather than being used to repay debts, remained unspent, earmarked for potential investments. Now, as the tightening phase comes to an end, experts from the Bank of Korea (BOK) warn that this surge in liquidity could re-ignite the domestic asset market, potentially leading to overheating.

On Monday, the Bank of Korea unveiled estimates showing that from 2020 to 2022, households’ excess savings ranged from 100 to 129 trillion won, representing 4.7 percent to 6.0 percent of last year’s nominal gross domestic product (GDP) and 9.7 percent to 12.4 percent of nominal private consumption. Excess savings are defined as the amount exceeding those above the pre-pandemic household saving rate, which stood at 6.1 percent to 7.5 percent between 2017 and 2019.

However, during the pandemic, this rate surged to 9.1 percent to 12.4 percent.

The increase in savings can be attributed to both a rise in income and a decline in spending in Korea. While the period of 2020 to 2021 saw a notable decrease in spending due to social distancing measures, the subsequent year witnessed a significant boost in household income.

According to the central bank, disposable income for Korean households increased at a rate of 4.6 percent from 2020 to 2022, compared to the 3.6 percent growth rate seen between 2017 and 2018.

In contrast to the U.S. where excess savings were channeled into increased consumer spending, Korean households not only refrained from spending their excess savings but also did not use them to pay off debts. The BOK’s caution stems from concerns that the reinvigorated housing market might be further fueled by the influx of surplus liquidity, thereby posing a serious threat to financial stability.

While the household debt-to-GDP ratio has been decreasing for the U.S. and the EU since 2021, Korea’s ratio remains relatively high, having increased during the pandemic period. The accumulated excess savings have largely flowed into liquid assets such as deposits, stocks, and funds.

According to the Bank of Korea, the increase in financial assets for households and non-profit organizations from 2020 to 2022 amounted to about 1,006.3 trillion won, significantly surpassing the growth in the preceding three years, which was 590.8 trillion won. During the same period, cash and deposit holdings increased by 507.4 trillion won, and stock and fund investments also rose by around 260 trillion won.

The Bank of Korea expressed concerns that the accumulated excess savings might be channeled into the housing market, leading to further escalation in household debt. The survey index for future housing prices, which measures the outlook for domestic house prices, rose to 100 last month, its highest level in more than a year.