Despite Construction Firms' Big Contract Wins, Construction Starts Plummet... Housing Supply Emergency

Major construction companies are hitting jackpot orders in urban renewal projects in the first half of this year. However, due to rising raw material costs and domestic and international uncertainties, these achievements are not translating into groundbreaking, casting a shadow over the housing supply outlook for the second half of the year.

According to the maintenance industry on the 29th, the cumulative order amount for urban renewal projects (including remodeling) by the top 10 domestic construction companies exceeded 20 trillion won in the first half of this year. This is about twice the amount compared to the same period last year. Six construction companies have already joined the "1 trillion won club." Leading the jackpot orders in the first half is Hyundai Construction. Recently, they consecutively won the remodeling project for Sanbon Mugunghwa Jugong Complex 1 and the redevelopment project for Busan Seogeumsa District 6, achieving a cumulative order amount of 6.9544 trillion won in just half a year. This surpasses last year's order amount (5.5499 trillion won) in the first half of this year and brings them close to the company's first-ever "7 trillion won urban renewal project club." Lotte Construction recently won the "Imun 4 Redevelopment Promotion Zone Redevelopment Project," achieving a cumulative order amount of 2.7406 trillion won this year. This quickly exceeded last year's annual cumulative order amount of 2.2229 trillion won.

The problem is that the record-breaking order performance is not leading to record-breaking groundbreaking. According to statistics from the Ministry of Land, Infrastructure and Transport, the building permit area from January to April this year increased by 13.1% compared to the same period last year. Residential areas increased by 16.4%, and non-residential areas by 11.4%. However, the groundbreaking area decreased by 13.3% compared to the same period last year. In particular, residential areas sharply declined by 28.8%.

In housing supply performance indicators, orders and permits are leading indicators, while groundbreaking and sales are coincident indicators. The discrepancy between leading and lagging indicators is interpreted as an effect of rising raw material prices, regulatory uncertainties, and labor costs. Park Cheol-han, a research fellow at the Construction Industry Research Institute, explained, "Due to the sharp rise in material prices caused by the Russia-Ukraine war, construction companies have obtained permits but are unable to start construction." Moreover, construction sites are also facing disruptions due to rising labor costs and strikes. The Korea Construction Association submitted a petition to the government yesterday urging strict law enforcement against illegal acts by construction unions. They claimed, "In a situation where survival rights are threatened by domestic and international adversities such as COVID-19, rising construction material prices, and insufficient construction costs, various illegal acts by unions have brought the construction industry to the brink of being unable to continue."

This situation is inevitably expected to negatively impact the government's core national agenda of supplying ‘2.5 million+α’ housing units. The government recently partially revised the price ceiling system for pre-sale prices and adjusted the basic construction cost for these reasons. However, maintenance associations and construction companies argue that the reflection of construction cost increases is minimal, so whether this will lead to an increase in groundbreaking remains uncertain. Research fellow Park said, "Due to rising costs, the number of loss-making sites is significantly increasing this year, so it is worth considering temporarily lowering taxes for small and medium construction companies." He added, "There is a need to prepare various deregulation measures such as high-density development."