Analysis and Implications of the Recent Increase in Housing Construction

The recent surge in housing construction is more related to banks’ lending attitudes than to the economy. And there is a larger increase in housing supply than demand, unlike in the past.● The rapid growth is mostly unrelated to non-housing sectors, and instead, is more connected to the easing of banks’ lending attitudes towards households following the launch of policy measures aimed at boosting the real estate market.● The slight drop in real prices in housing construction, in spite of the sharp increase in construction volume, implies that the recent increase is driven by supply not demand. If slower growth of housing construction appears in the future, firms in the construction industry may suffer from their worsening profitablities. Therefore, financial stability of construction companies should be observed preemptively.● Despite enjoying improvements in profitability, construction companies may experience weakening financial stability if faced with adjustments and interest rate hikes.● Given that structural adjustments during a declining period is much more costly, construction companies with low profitability and weak financial fundamentals should undergo restructuring in advance.Meanwhile, the recent surge in housing construction on mounting mortgage debt implies that the expected returns are low in production-related sectors. To tackle this issue, efforts are needed to expand growth potential.● Increased housing construction on growing housing debt and significantly reduced corporate debt and facilities investment means that funds are rushing into the housing construction sector as a result of the low expected return in production-related sectors.● Under the circumstances, for financial resources to flow into productivity-enhancing investments, policy efforts that strengthen the efficiency of the Korean economy, such as restructuring insolvent companies and enhancing labor market flexibility, are needed rather than short-term stimulus packages.