Go to contents

[Editorial] Construction Companies and Moral Hazard

Posted October. 22, 2008 03:01,   


The government unveiled a real estate stimulus package that will inject nine trillion won (6.8 billion U.S. dollars) into the construction industry to purchase new unsold homes and land from private builders. Extensions will go to the grace period of household credit and that of credit for those who borrowed money from a bank to buy a new home on condition that they sell their existing home.

This emergency measure is intended to stop the financial turmoil from affecting the real economy. A long recession in the construction industry, which accounts for 15 percent of GDP, could result in a chain reaction throughout the entire economy including domestic consumption, investment and employment. One builder per day has closed on average this year, thus the number of menial jobs at construction sites has decreased, making things more difficult for the low-income bracket.

Household debts will become another big risk if interest rates rise and property prices decline at a time when the country’s household debts exceed 500 trillion won (378 billion dollars). This has forced the government to release a comprehensive package on boosting construction, alleviating the burden of household debts, and reviving property transactions.

The measures are expected to partially help construction companies, which have been squeezed in the credit crunch due to many unsold homes. They will also assist financial institutions, which are worried over the potential credit risks of real estate project finance worth 97 trillion won (73.4 billion dollars).

Taxpayers’ money, however, should not go to builders guilty of moral hazard without a price. With more than 160,000 unsold apartments on the market, they ignored the basic rule of supply and demand rule in thinking the housing boom would last and set the prices of new houses high. The construction industry has repeated the cycle of inflating new home prices for profits in boom times while subsisting on state assistance for job creation in recessions.

The government must force construction companies with no possibility of recovery out of the market, while asking those receiving state support for rigorous rescue efforts such as sale of assets. No matter how important the industry may be, taxpayers’ money should not be wasted to save companies that committed moral hazard.