Construction investment is at risk of undermining the economy's growth rate for the longest period on record. A decade ago, construction investment accounted for a significant portion of economic growth. While this is a common phenomenon with economic advancement, the entrenched high-cost structure in the construction industry also plays a significant role. A rebound in construction investment seems possible only if the reflected volume of construction starts in the third new town, along with construction orders and corporate investments, revives.
According to the Bank of Korea's Economic Statistics System on the 16th, the growth contribution of construction investment in the fourth quarter of last year (seasonally adjusted, real) was -0.6 percentage points (p), marking the third consecutive quarter of ‘minus’ after the second quarter (-0.3 p) and third quarter (-0.5 p) of last year. This is the longest period since the first to third quarters of 2010 when the financial crisis occurred. The growth contribution of construction investment was recorded at -0.1 p in the first quarter of 2010, -0.8 p in the second quarter, and -0.1 p in the third quarter. A negative contribution from construction investment means that it undermines the country's economic growth rate.
If the growth contribution of construction investment continues to show a negative value until the first quarter of this year, it will be the longest period on record. The previous record was during the first to fourth quarters of 1998, immediately after the financial crisis, where it showed negative values for four consecutive quarters. The growth contribution of construction investment in the first quarter of 1998 was -1.9 p, -1.3 p in the second quarter, -0.5 p in the third quarter, and -0.1 p in the fourth quarter. The Bank of Korea plans to announce the preliminary growth rate of Gross Domestic Product (GDP) for the first quarter of 2025 on the 24th.
It is no exaggeration to say that construction investment has driven economic growth since the financial crisis. From the first quarter of 2015 to the third quarter of 2017, it contributed to increased growth rates for eleven consecutive quarters. Particularly, in the first quarter of 2016, the growth rate was 0.4% compared to the previous quarter, and the growth contribution of construction investment was 0.5 p. The contribution of construction investment exceeded the overall growth rate.
The reason construction investment has declined as a factor lowering the growth rate after 10 years is that construction investment is experiencing negative growth. The growth rate of construction investment in the second quarter of last year was -1.7% compared to the previous quarter. It was followed by -3.6% in the third quarter and -4.5% in the fourth quarter. The widening scope of negative growth also meant that the usual base effect did not take place. Notably, the quarterly growth rate of construction investment in the fourth quarter of last year (-4.5%) recorded the largest negative growth rate since the financial crisis in the second quarter of 2010 (-5.1%).
The decline in the growth rate of construction investment is a common characteristic of advanced countries. Most of the basic infrastructure has been established, and housing has stabilized, leading to a reduction in 'food sources' for the construction industry. During the national housing policies from the 1960s to the 1980s, the annual growth rate of construction investment recorded double digits for a prolonged period. In 1968, the growth rate of construction investment was 43.8%, and in the following year, it was 30.2%. From 1973 to 1978, it experienced double-digit growth every year except for one year (1975).
The tight project financing (PF) is cited as a factor driving down construction investment. Following the COVID-19 pandemic and the Russia-Ukraine war, construction costs have soared uncontrollably. According to the Korea Institute of Civil Engineering and Building Technology, the construction cost index, which was 100 in 2020, rose to 117.37 in 2021, 125.33 in 2022, and reached an all-time high of 130.45 in September last year. The real estate PF crisis intensified following the 'Legoland incident' in September 2022. As securing funds has become challenging, construction has been halted or projects have not commenced, exacerbating the high-cost structure of the construction industry. This year, nine medium-sized construction companies have applied for court protective management. In January, Shin Dong-A Construction (ranked 58th in construction capacity evaluation) and Daecho Construction (ranked 103rd), in February, SAMBU Construction (ranked 71st) and An-Kang Construction (ranked 116th), Daewoo Shipbuilding & Marine Engineering (ranked 83rd), and Samjeong Corporation (ranked 114th), in March, Byucksan Engineering (ranked 180th), and this month, EE-HWA CONSTRUCTION (ranked 134th) and Daehung Construction (ranked 96th) have knocked on the door of the debt restructuring court.
Jo Young-moo, a research fellow at LG Economic Research Institute, noted, "As the economy ages and advanced, there tends to be a decline in the growth rate of construction investment," adding, "In the case of our country, the combination of high-cost issues and difficulties in securing PF funds has led to negative growth in construction investment. "
The construction industry believes that construction investment could rebound around the second half of 2026, when the volume of the third new town is reflected. At the end of last year, Hanam Gyosan began construction, followed by Goyang Changneung, Namyangju Wangsuk, Incheon Gyeyang, and Bucheon Daejang, which are expected to begin construction once the land compensation procedures are completed by the end of this year. The housing supply volume for the third new town stands at 174,000 dwellings. Construction companies that expanded their projects significantly during the real estate boom from 2021 to 2022 currently lack the ability for new investments. The Bank of Korea projected that construction investment would contract by 1.3% this year.
Jo Young-moo from Daewoo E&C stated, "Due to the recession in the housing market, there has been an unprecedented wave of bankruptcies among construction companies," adding, "It may take until the second half of 2026, when the volume of the third new town is reflected, for construction investment to reverse. "