The Bank of Korea (BOK) has conducted a comparative analysis of the cost of living between South Korea and developed countries, revealing significant discrepancies. Grocery prices in South Korea are 56% higher than the average in developed countries, and housing costs are 23% higher. Conversely, electricity, gas, and water bills are 36% lower than the average in those countries due to the South Korean government’s policy of maintaining low prices by absorbing losses incurred by public enterprises for political reasons.
The BOK attributes the high grocery prices to several factors: low productivity in the agricultural sector that supplies raw materials, limited openness to fruit and vegetable imports, and excessive intermediate distribution margins. Labor productivity in Korea’s agricultural sector ranks among the lowest in the OECD, primarily due to small farm sizes and an aging farmer population. In contrast, the share of fruit imports in Korea is less than 40%, compared to over 70% in the United States. Additionally, distribution costs account for 50% of consumer prices.
The high cost of living is largely driven by exorbitant housing prices. In Seoul, the price-to-income ratio (PIR) stands at 25, significantly higher than in other major cities such as New York (11) and Copenhagen (9). Habitat for Humanity, a United Nations organization focused on housing quality issues, recommends a PIR of 3-5. The steep housing prices have resulted in the average monthly rent for a newly built villa in Seoul, primarily occupied by the 2030 generation, soaring to 1.1 million won (about $731), with young people spending over 30% of their monthly income on housing.
The price disparity between food, housing, and utilities in South Korea compared to developed countries is widening. In 1990, food prices in Korea were 20% higher than the OECD average; by 2023, they were more than 50% higher. Utility bills, which were about 10% cheaper than in developed countries in 1990, are now more than 30% cheaper.
The BOK emphasizes that Korea’s distorted price structure cannot be addressed by monetary policy alone; structural policy responses are required. To tackle high food prices, it is imperative to increase agricultural productivity by fostering entrepreneurial farmers, diversifying import sources for fruits and vegetables, and reducing distribution margins. To mitigate housing costs, it is essential to increase the supply of new housing in well-located areas and expand the availability of rental housing for young people. Moreover, low energy prices, which promote overconsumption and are unsustainable in a zero-carbon world, should be gradually normalized through price increases.
