Lowest Construction Start Rate in 12 Years Compared to Permits... Triple Burden of Raw Materials, Labor Costs, and Interest Rates

The ratio of apartment construction starts to permits has fallen to its lowest level in 12 years. The widening gap between permits and construction starts is interpreted as a characteristic of a housing market downturn. This reflects the overall deterioration of the housing market environment, including a transaction freeze in the housing sales market, rising raw material costs, and increases in interest rates and wages.

According to housing statistics from the Ministry of Land, Infrastructure and Transport on the 1st, the ratio of apartment construction starts (139,759 units) to permits (208,257 units) in the first half of this year (January to June) was 67.1%. This is the lowest level since 2010, when it was 37.3%. Since rising to the 70% range in 2011, this ratio had been maintained between 70% and 120% until last year.

Generally, apartment projects begin construction within 2 to 3 months after permits are issued. The shorter the period from permit to construction start, the more financial costs can be minimized. The widening gap in the permit-to-construction ratio reflects concerns about the housing market. When risks such as unsold units increase, developers tend to adjust the timing of construction and sales to select the optimal sales period, even if it means prolonging the project duration. In fact, during the housing market downturn and immediately after the global financial crisis from 2008 to 2010, the ratio of construction starts to permits was only 35% to 55%.

Recently, the construction and housing markets have been facing continuous negative factors. In the first half of this year, prices of major construction materials such as cement and ready-mixed concrete rose by more than 20%, and financial burdens on developers have sharply increased due to interest rate hikes. Rising labor costs have also emerged as a source of conflict, halting construction sites. The housing sales market has fallen into an unprecedented transaction freeze. Even after construction is completed, units that remain unsold?referred to as "post-completion unsold" or "malignant unsold"?reached 7,130 nationwide in June, a 4.4% increase from the previous month.

Heo Yoon-kyung, head of the Economic and Financial Research Office at the Korea Construction Industry Research Institute, explained, "The phenomenon of a declining ratio of construction starts to permits is a sign of a market downturn. In the first half of this year, the combined effects of expanding unsold unit risks and soaring construction costs appear to have caused a sharp increase in projects that have obtained permits but have not started construction."

The construction industry is somewhat hopeful that from this month, the loan-to-value ratio (LTV) for first-time homebuyers will be expanded to 80%, regardless of regulatory areas or housing prices. This is because the loan limit will increase from the previous maximum of 400 million KRW to 600 million KRW, potentially revitalizing new purchases and subscription demand. However, the debt service ratio (DSR) regulation remains in place, and with ongoing interest rate hikes causing a sharp increase in interest burdens, there is considerable opposition arguing that demand for loans to purchase or subscribe will remain limited. Although the government introduced measures last month such as reforming the price ceiling system and raising the basic construction cost, the prevailing view is that these are insufficient to lead to increased construction starts.

This content was produced with the assistance of AI translation services.