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Implications of the Rapid Increase in Pre-sale Apartments

Inho Song 2015/12/03
■ The number of pre-sale apartments in 2015 far exceeds the long-term growth trend in housing demand in the Korean economy.

○ According to the analysis, the rapid increase in the number of pre-sale apartments in 2015 will increase the number of unsold new apartments after completion with a three-year time lag.

○ In particular, if the favorable demand conditions of 2015 are not maintained throughout the coming years, the number of unsold new apartments after completion could also significantly increase.

○ Meanwhile, a rise in the number of unsold new apartments after completion could result in unsettled receivables and loan loss reserves, possibly leading to a further deterioration of construction firms‘ profitability and cash flow.

■ Therefore, preparatory measures need to be developed to cope with the underlying risks that the recent short-term rise in housing demand and steep increase in pre-sale apartments could pose to both housing and financial markets in the mid- to long-term.

○ As for group loans, more rigidity is required for screening individual buyer’s credit status at the pre-sale phase so that the soundness of the loan will be enhanced. Furthermore, additional measures should be prepared to minimize the negative effects brought on by buyers not moving in, etc.

○ In addition, it is necessary to stay alert to the possibility of a delayed restructuring of distressed construction firms simply based on an optimistic assumption about the future of the construction business.

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