Dear friends,
An interesting article caught our eye a few days ago in the lifestyle press. According to research from Morgan Stanley, the nation that spends most on personal luxury goods per capita is South Korea. While S. Korea is famous for setting fashion trends, especially for younger generations, the news surprised us. S. Korea is not the richest country in the world and it barely made it to the Top 30 of Global GDP per capita rankings. Isn’t S. Korea famous for its overworked and underpaid employees? Wasn’t the whole theme of Squid Game and Parasite around the super-expensive capital of Seoul where only the few privileged are enjoying life? All this is true, but somehow they still managed to buy more luxury goods than anybody else on the planet. Let’s take a look how.
There are several societal factors that lead S. Korean people to splurge on luxury according to the said research. The desire to demonstrate social standing, the need to show financial success, lack of remorse is showing off wealth, and pressure from social icons and fashion trend-setters. Above all, the reason was the increase in household wealth, thanks to S. Korea’s runaway housing boom. S. Koreans hold 76% of their wealth in Real Estate and property prices in some cities doubled during the pandemic, increasing perceived wealth but also making life very expensive in the meantime. But then it doesn’t make sense, if life is becoming more expensive, why do people spend their savings in luxury items?
Enter economists Mr. Armen Alchian and Mr. William R Allen. In their 1964 book they explained that when the cost of two products increases by an equal amount, consumption shifts towards the most expensive product. This happens because the added per-unit amount on both products decreases the relative price of the higher-grade product. So as everything in S. Korea was becoming more expensive, luxury goods were becoming relatively cheaper. And S. Koreans were loading up on limited edition Chanels, Bulgaris and Ferragamos. Which is very interesting, but what does that have to do with Spanish Real Estate?
The effect works the other way too. If a city has expensive Real Estate, that city will attract rich individuals and jobs that pay well. Because jobs with lower wages are being pushed out, that makes Real Estate even more expensive. The city of Barcelona is experiencing exactly this effect and it explains why even though Real Estate seems too pricey, it will become even pricier. While rent is gradually increasing everywhere in Spain, rent in Barcelona is still higher but is becoming relatively less expensive; so more and more people want to move there. Which in turn increases the cost of everything else, amplifying the effect that caused the cost increase in the first place. The investors who understand this relative value effect prefer to buy properties in expensive areas.
At Artemis Assets we are achieving above average investment returns for our clients because we understand what is driving the market in Barcelona. Talk to us about your future goals, we have some ideas to help you take advantage of these economic trends.
Until the next one!
