ED Homebuilders' woes
What will be the biggest economic issue for Korea next year?
Most people will cite curbing inflation and restoring export vitality. For policymakers, however, there is a more immediate headache: easing the housing crunch while preventing a further deterioration of the home construction industry.
At the center is the looming project financing (PF) crisis. PF is a financing technique that borrows money for a project by pledging the future revenue of a real estate development project, such as an apartment building. There is no collateral such as homes.
In a booming real estate market, this is not a problem. In a downturn, however, all parties involved are hit by a chain reaction if the developer fails. These include the financial institution that lent the money, the construction company that promised to complete the project, and the trust company that holds the building contractor's defaulted bonds.
The prolonged high interest rates, housing market slump, and soaring construction costs drive PF-based homebuilders into insolvency.
It’s natural that Choi Sang-mok, the finance minister nominee, vowed to prioritize tackling the PF crisis at the start of his confirmation hearing at the National Assembly on Tuesday. To do so, the government must quickly and transparently distinguish between builders that can be recovered and those that cannot. However, letting weak homebuilders go under will cause outcries from affected companies and homebuyers.
At stake seems to be how to ensure a soft landing -- again. However, the Yoon Suk Yeol administration should refrain from being too focused on the political calendar, i.e., the parliamentary elections next April, in doing so. According to financial authorities, total outstanding PF loans amounted to 134.3 trillion won ($102.7 billion) in September, up sharply from 92.5 trillion won at the end of 2020. The loan delinquency rate soared from 0.55 percent to 2.42 percent. There is no time to hesitate further.
Looking back, the Yoon administration’s adherence to a soft landing has aggravated the housing market's problems. The previous government’s fight against property speculators by reining in home prices ended up being a complete failure, sending apartment prices sky-high. Despite his good intentions, former President Moon Jae-in underestimated Koreans’ desire to own homes in the greater Seoul area that houses half of the country's population.
The consequent property market slump has removed some bubbles, but apartment prices in Korea remain too high. They must go down further. A wage earner must save all of his or her income for 26 years to buy an apartment in Seoul, twice as long as in London. The exorbitant prices of homes are one of the reasons youngsters avoid marrying and having children. The government must stop inducing young people to buy homes with bank loans.
The new economic team must minimize the damage from the PF crisis. It should also break away from the habit of boosting the economy through a property boom. An energy drink cannot strengthen one's fundamental health. Instead, the government must supply decent rental homes at reasonable prices for a long period, like in some advanced countries.
Economists here and abroad say Korea resembles Japan economically, especially in the latter’s so-called Lost Decades of economic stagnation since the asset price bubble burst in late 1991. Frothy property prices and their sudden rupture reduced private consumption, leading to a deflation and near recession in the neighboring country. Much will depend on whether and how political leaders can calm people’s anxiousness to own homes with the guarantee of decent and affordable rental homes.
The president’s recent declaration of the “provincial era” of balanced regional development was a hopeful signal. However, the government and its party dashed cold water on such expectations by proposing to make the Seoul metro region even greater by incorporating some satellite towns into the capital city.
Korea’s future will depend on how it decentralizes the national function and turns homes into places to live, not own. If the government rekindles the property boom and increases mortgage-triggered household debt further, the nation will have no future.
If the government tackles the PF crisis by boldly letting problematic homebuilders sink, that will provide some hope. If it puts the job off until after the elections, Korea will move closer to another crisis.
It will depend on how politicians can restore the public's trust with trustworthy policies.