[The Editors' Verdict] The Construction Industry Has Forgotten the Lessons of Two Crises

Government Resolves Past Unsold Housing Crisis
Self-Help Efforts Needed Before Seeking Assistance

Time bombs are lurking throughout the housing construction industry. Starting in Seoul, the nationwide spread of jeonse fraud in Incheon, Dongtan, Busan, and other areas shook the real estate market, and now there is talk of a 'May crisis theory' in the construction industry. The scenario of the May crisis theory is that the liquidity crisis of construction companies will spread from local areas to the metropolitan area, and from small construction companies to medium-sized construction companies, leading to a wave of bankruptcies.

Warning signs of the crisis are also being detected. According to statistics from the Ministry of Land, Infrastructure and Transport, 147 general construction companies have announced closure notices as of April 24 this year. This includes some cases where only certain business sectors have filed for closure or have registered for business type changes. In other words, it does not mean that all 147 companies have shut down. However, considering that the number of closure notices during the same period last year was 91, it is clear that the recent management situation of construction companies is not very good.

There are various causes for the liquidity crisis of construction companies, but among them, the impact of unsold housing is significant. As of the end of February this year, the number of unsold houses nationwide was 75,438 units, the highest since November 2012. The number of unsold units after completion, known as 'malignant unsold housing,' is also as high as 8,554 units. If these unsold houses are left unattended, the insolvency of construction companies could spread to the financial sector, adversely affecting the overall economy. This is the substance of the recent May crisis theory that the construction industry is concerned about, but the real emphasis is on "(therefore) the government must buy them."

Of course, it is impossible to just watch the construction industry, which accounts for about 15% of South Korea's gross domestic product (GDP), shake. Nevertheless, it is not easy to accept this mood in the construction industry. The construction industry has largely brought the crisis upon itself, yet it is reaching out its hand as if it is only natural.

Moreover, the construction industry has had two bitter experiences. The first was the 1997 IMF foreign exchange crisis that broke out after the construction of the first phase of new towns in the metropolitan area, and the second was the 2008 global financial crisis that hit after nationwide sales fever led to competitive business expansion. The first case involved diversification into retail and leisure businesses such as department stores and amusement parks, which faltered during the foreign exchange crisis, while the second was similar to now, where medium-sized construction companies expanded housing supply during a golden sales period but were stranded by the shock of the global financial crisis. At that time, the construction industry was able to overcome the crisis thanks to the government purchasing unsold houses through a repurchase agreement method. The current construction industry's eager anticipation of unsold housing measures is based on this precedent.

However, there is something that must be done first. That is the self-help efforts of construction companies. The cause of unsold housing is simple. Apartments were supplied in locations that did not meet consumer demand, or they were supplied at prices too high without considering consumers' purchasing power. If the result was a bold sale relying solely on the market, it is right for the construction companies to take responsibility.

First, the prices of unsold houses must be lowered. No matter how bad the market is, if the sale price is competitive, applicants will naturally flock. The sales projects must also be re-examined. Priorities should be set carefully by assessing whether there is sufficient demand.

The current crisis, the third to hit, will be judged by history later, but if construction companies only send out SOS signals without painful self-help efforts, they will inevitably face criticism for moral hazard for a long time. How long will they continue to hear the cynical remark, 'That's just how construction companies are'? Twice is enough, isn't it?

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