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Analysis and Implications of the Recent Increase in Housing Construction

Jiyoon Oh, Kyu-Chul Jung 2016/11/30
■ 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.
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