The Korean housing market is in crisis
The global economic recession of 2008 stunted Korea’s economic growth rate to a mere 2.5%. Construction companies expected the economy to recover soon and began to build houses, taking advantage of the lowered prices of raw materials. It looked as though it was a perfectly viable business plan; build it cheap and sell it high. Members of CAK (Construction Association of Korea) grew in number from 55,248 in 2008 to 55,692 by the end of 2009. These companies began the ruthless construction of apartment complexes, finishing the job quickly. There are currently 11,000 finished apartment complexes with no owners wanting to move in. This is because prices are too high in metropolitan cities where most of these complexes are located. Regardless of the economic recession, the price of these properties is still hardly affordable. The Korean government has identified the main reason for this situation as there being simply too many companies competing in the same market.
Assessments
The FSS (Financial Supervisory Service) conducted a credit risk evaluation of the 300 top construction companies at the government’s request. The companies went through an evaluation process set by banking authorities and where given a grade from A to D. Companies that ranked C or below face workouts (government’s adjustment process for companies facing bankruptcy) from the government, including restructuring, while D-grade companies will be placed under legal receivership. Most of these companies face acquisition from bigger companies, or are at risk of having their operations suspended.
Real estate analyst, Yang Ji-young commented, “Only 20 or so companies out of the top 100 are safe from restructuring. It is very possible that a number of large-scale construction companies will be forced to file for bankruptcy.”
Furthermore, the Ministry of Land, Transport and Maritime Affairs (MLTM) conducted an evaluation last November during which it listed 8,090 construction companies that fell short of the government’s standards. These companies were either illegally operated during suspension and most had not obtained proper permits. Licenses were revoked for 90% of these companies. This year, the evaluation is to further extend into companies operating irresponsibly, in other words, companies that are overextending their projects with insufficient budgets. The Korean government has assessed that these “stationary” companies are adding to the already stagnant Korean housing market and need to be eliminated.
Large-scale Korean construction companies have worked very hard to achieve a strong brand image, with big corporations such as Samsung and GS possessing their own brand names, such as Raemian and Xii. Consumers associate quality with these brand names, while smaller companies that lack the resources to do such large-scale brand marketing are deemed unfavorable. The Korean population is also mostly concentrated in metropolitan cities, resulting in a concentration of housing in these areas. The most unfortunate part of this is that land prices in these metropolis areas rarely fall. Consequently, despite the stagnant housing market, construction companies are unable to lower housing prices due to the initial building cost.
Naturally, creditors are worried over loan payments. Since these companies decided to build while they were originally under budget, credit loans were unavoidable. Since houses are not being sold, these construction companies do not have a source of income. Consequently, companies are unable to liquidate their assets. What exactly will take occur once these companies file for bankruptcy still remains an enigma.
Possible Solutions
Bankruptcies by large-scale corporations will most certainly have a trickle-down effect on related industries, such as raw material manufacturers. In order to prevent this from happening, the government needs to amend current housing/property regulations and properly implement them. The first and foremost solution is to reduce property and transfer taxes. Once the burden of high transfer taxes is lifted, it is estimated that buyers will be more eager to purchase properties. Real estate analyst, Yang Ji-young also suggests, “Alleviating regulations in DTI (debt to income ratio) and LTV (loan to value ratio) will also reduce the burden on construction companies when they are paying back their loans.” Furthermore, the government can work towards the even distribution of property through different areas in order to solve the problem of housing concentration in metropolis areas. The last and probably the most effective solution will be for the Ministry of Land, Transport, and Maritime Affairs to regulate housing prices and require construction companies to sell at a price set by the ministry. The Korean government is aiming to further develop specific plans to relieve the current housing market crisis.