Soaring Construction Costs Fuel Fears of Looming Housing Shortage

Prolonged increases in construction costs and a tightening project financing (PF) market are weakening the foundation for private housing supply. As leading supply indicators such as permits, groundbreaking, and completion deteriorate, industry concerns are growing that the current supply contraction could lead to a severe housing shortage in two to three years.

Soaring construction material prices are exacerbating the cost burden. The construction cost index in April 2023 rose 4.44% compared to April 2022. Prices for asphalt concrete and asphalt products surged 28.83% from the previous month, while ready-mix concrete increased by 4.08% and construction metal products by 3.91%. The failure of regulations to adequately reflect actual cost increases is worsening project profitability, leading to frequent disputes between developers and builders over cost hikes, and in some cases, delays in groundbreaking or builders withdrawing from contracts.

The tightening project financing (PF) market, characterized by high interest rates and economic slowdown, is making it difficult for businesses to secure project funds as financial institutions strengthen their scrutiny due to real estate uncertainties. Some projects are facing the risk of collapse after failing to extend bridge loan maturities.

As of the end of April 2024, there were 65,179 unsold housing units nationwide. Approximately 80% of these completed but unsold units are concentrated in non-metropolitan areas, increasing the financial burden on local construction companies.

From January to April 2024, housing permits nationwide totaled 79,371 units, an 11.8% decrease compared to the same period last year. Notably, housing permits in Seoul during the same period dropped by 24.0% to 12,760 units, fueling concerns about supply contraction. Completion figures, a lagging indicator, show an even more severe decline. From January to April 2024, housing completions nationwide plummeted by 45.9% to 75,230 units compared to the same period last year. Completions in the metropolitan area decreased by 41.0%, and in Seoul by 41.3%. The nearly 50% reduction in actual move-in ready units could impact the jeonse (lump-sum deposit) and sales markets in the future.

The government is pursuing policy improvements, including updating standard market unit prices and standard itemized cost estimates to alleviate construction cost burdens, expanding direct payment by clients, and strengthening safety management for aging equipment. The industry argues that more fundamental financial support and measures to improve project profitability must be implemented concurrently.

There are warnings that the current deterioration of supply indicators may be more than just an economic adjustment and could signal future supply shortages. A decline in permits and groundbreaking typically leads to a decrease in completed units two to three years later. If the current constricted supply environment persists, it could become a factor driving up future jeonse and rental prices and destabilizing the housing market. A research fellow at the Korea Institute of Construction Policy Research explained that although construction costs, PF, unsold units, and completed units may seem to move independently, they are actually connected in a chain with time lags. He added that if risks related to construction costs, funding, and labor are left unaddressed amidst declining permits and groundbreaking, it could lead to supply shortages and market instability in a few years.