Korean Construction Industry In a Rut

Kim, director of a mid-sized construction company, cannot sleep these days because contract rate of the apartment in Busan is a mere 10 percent since last month.

“I’ve been in apartment sales business for ten years and the sluggish economy is almost unendurable. I am worried that we might not even earn more than we invested,” said Kim.

Lee, manager of another construction company, is also worried about the on-going subway construction in Seongnam city, Gyeonggi Province. The government placed the order and promised to give 20 billion won in construction costs, but provided only 4.0 billion won so far. With no money to carry out the construction, the company is resorting to expedient methods such as payment on account, and reduced the number of on-site workers by 30 percent.

The construction industry is having a hard time. This is a burden to the economy as a whole because the construction industry is known to affect other industries to a great extent.

Domestic construction firms received orders worth 9.26 trillion won in June, 7.7 percent less than the same period last year. In fact, the monthly contraction amount of the construction industry was weaker than the same month last year for four consecutive months since March.

Construction revenue in June increased a mere 0.8 percent than last June to 7.23 trillion won. This is the lowest growth rate since last February.

There are even rumors in the curb loan market that some local construction companies face bankruptcy due to their financial difficulties.

The sluggish construction industry is imposing an adverse effect on economic growth and employment.

Quarterly real economic growth in the second quarter, released by the Bank of Korea, was a mere 0.8 percent, the lowest in five quarters.

Private consumption and facility investment increased 0.9 percent and 2.8 percent respectively, but investment in the construction sector decreased 3.9 percent, dragging down overall growth.

The Hyundai Research Institute recently released a report arguing that recession of the construction industry would be prolonged. The report estimated that 15,000 jobs vanished in May alone due to the recession in the construction industry.

The government plans to increase investment in the public construction sector while not adjusting real estate policies related to private construction.

“The construction industry would be revived if we invest 11.1 trillion won in social overhead capital (SOC) in the later half of this year,” said Bahk Byong-won, Vice Minister of Finance and Economy.

“It will not be easy to change real estate policies in this administration,” said another high-level official in the Ministry.

However, many experts are doubtful about reviving the construction industry with increased investment in the public sector.

“There is a need to ease real estate regulations progressively, and execute the budget allocated for the public sector more swiftly,” said Sogang University professor Kim Kyung-hwan.

ddr@donga.com smhong@donga.com