“Impact of Weak Housing Construction in the Second Half... Downward Pressure on Economic Growth Rate”

KDI, Impact of Interest Rate Hikes on Housing Construction and Future Outlook

As the impact of high interest rates continues, a sharp decline in housing construction is expected to lower the economic growth rate.

On the 2nd, KDI diagnosed this in its report titled ‘The Impact of Interest Rate Hikes on Housing Construction and Future Outlook.’ Hwang Se-jin, a senior researcher at KDI's Economic Outlook Office, forecasted, “Housing construction in 2023 and 2024 will sharply decrease, acting as a significant downward factor on economic growth.”

The contraction in housing construction is expected to reduce the economic growth rate by 0.3 percentage points in 2023 and further decrease it by 0.4 to 0.5 percentage points in 2024. The analysis indicated that sustained high interest rates will cause housing starts to decline by up to 5.8%. This is due to increased borrowing costs for construction companies and higher construction expenses, which reduce the housing construction area.

Researcher Hwang analyzed, “When the economic growth rate fell to 1.3% year-on-year in the fourth quarter of last year due to sluggish exports, housing construction contributed -0.4 percentage points to the economic growth rate, intensifying the slowdown.” He added, “As interest rate hikes continue, housing starts, a key leading indicator of housing construction, sharply declined by 25.9% in 2022, suggesting the possibility of continued housing construction weakness.”

However, he added, “Due to the recent decline in housing prices, housing construction may remain subdued for a considerable period, potentially leading to a shortage in housing supply. Therefore, efforts to improve the overall conditions so that housing supply can respond more flexibly to changes in demand should continue.”

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