Geonsanyeon "Next Year Construction Orders Growth Ends... Jeonse Prices Rise Due to Inflow of Purchase Demand"

Construction Orders Hit Record High This Year... Lowest in 3 Years Expected Next Year
Nationwide Sale Prices Expected to Fall 2.5%, Jeonse Prices to Rise 0.5%

Apartment complex in downtown Seoul / Photo by Yonhap News

[Asia Economy Reporter Noh Kyung-jo] Due to a decrease in the social overhead capital (SOC) budget, a rise in the base interest rate, and increased market uncertainty, domestic construction orders next year are predicted to decline by 7.5% from this year to 206.8 trillion won. However, construction investment is expected to increase by 0.1%.

The Korea Construction Industry Research Institute announced this on the 2nd at the '2023 Construction and Real Estate Market Outlook Seminar' held at the Construction Hall in Nonhyeon-dong, Gangnam. Researcher Park Cheol-han of the institute stated, "Construction orders have increased for four consecutive years since 2019, reaching a record high of 223.5 trillion won this year, showing favorable performance. However, next year, due to more than a 10% reduction in the government’s SOC budget, a sharp rise in the base interest rate, and worsening domestic and international conditions, the growth trend will end, resulting in the lowest performance in three years."

By ordering sector, public orders are expected to decrease by 3.1%, and private orders by 9.0%. By construction type, civil engineering and housing orders are projected to decline by 3.8% and 6.3%, respectively, while non-residential building orders are expected to drop by 11.5%. Construction investment is also expected to remain nearly flat, with sluggishness anticipated in commercial buildings and civil engineering sectors. Credit crunches are already occurring across development projects due to interest rate hikes and strengthened financial regulations on real estate project financing (PF) businesses.

The institute suggested that efforts to stabilize financial markets, strategic fiscal management, and bold deregulation for a soft landing of the housing market are necessary. Researcher Park said, "Refusal to extend PF market loans is a typical liquidity crisis, increasing the number of construction companies struggling to secure construction funds due to blocked loans, and the risk of bankruptcy caused by joint guarantees is also growing. Active government crisis response and securing domestic and international market trust will be key to stable growth of the domestic economy next year."

He added, "In the first half of next year, it is necessary to increase orders mainly for small-scale construction projects to avoid stimulating inflationary pressures, and in the second half, to advance the start of large-scale projects previously postponed to maximize economic stimulus effects. To normalize market functions and achieve a soft landing in the housing market, it is essential to expand 'first deregulation, then housing supply.'"

Regarding the real estate market, nationwide sale prices are expected to fall by 2.5%, while jeonse (long-term lease) prices are projected to rise by 0.5%. By region, sale prices are forecasted to decline by 2.0% in the Seoul metropolitan area and 3.0% in provincial areas.

This is analyzed to be due to the already high absolute housing prices and the prolonged high-interest rate environment exerting downward pressure on prices. Deputy Researcher Kim Seong-hwan of the institute said, "Due to the housing-related deregulation announced on the 28th of last month, demand is expected to increase compared to before," but added, "It is difficult to expect demand inflows large enough to change the market trend."

Jeonse prices are expected to rebound due to decreased purchase demand. Although monthly rent transactions have increased, relatively reducing the position of jeonse in the rental market, overall rental demand is rising. Since monthly rent prices are rising sharply, it is difficult for jeonse prices to continue falling.

Deputy Researcher Kim advised, "Since the housing market is at a turning point, market participants should approach cautiously. However, given the sound financial health, it is advisable to consider economic crisis theories but not to blindly trust them."

Regarding construction companies, he urged, "They should conduct conservative project profitability evaluations and thoroughly manage risks," and added, "Declining profitability in the private sector could negatively affect achieving planned housing supply volumes, so the government should respond proactively."

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