How Long Will Interest Rate Hikes Continue... Red Light for Construction Investment Next Year Too

"Next Year's Construction Investment Growth Rate Forecasted at 0~1% Range"
Increased Volatility Makes Future Investment Predictions Difficult

Managers are conducting a safety inspection at an apartment construction site in Gyeonggi-do. / Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Noh Kyung-jo] The construction investment growth rate for next year is expected to remain in the 0~1% range. This is due to concerns that the sharply rising interest rates in a short period could trigger a credit crunch, increasing market turmoil.

According to the Construction Trend Briefing (No. 878) recently published by the Korea Research Institute for Construction Industry on the 30th, when the base interest rate rises by 0.5 percentage points (p), construction investment decreases by approximately 0.14~0.26 percentage points in the first year. This means that the base interest rate increases sequentially this year will have a negative (-) impact on next year’s construction investment.

The Monetary Policy Committee of the Bank of Korea raised the base interest rate six times this year?in January, April, May, July, August, and October. The base interest rate, which was 1.0% at the beginning of the year, currently stands at 3.0%. It is the first time since May 1999, when statistics began to be provided, that the base interest rate has risen by 2 percentage points in less than a year, and it is also the first time in 10 years since October 2012 that it has returned to the 3% range.

Generally, when market interest rates rise, construction projects may be accelerated due to cost pressures, but this time the situation is somewhat different. The Korea Research Institute for Construction Industry stated, "The sharp increase in material prices and procurement interest rates has increased volatility, making future investment predictions difficult," adding, "Project financing (PF) loans are rapidly shrinking, and new loans for companies’ new businesses are also expected to decrease."

They continued, "According to a Bank of Korea survey, investment in commercial buildings is more sensitive to interest rates than investment in industrial buildings," and added, "Comparing the ripple effects of interest rate increases, suppliers are affected, but demand contraction is more severe, leading to expected decreases in housing transactions and subscription applications, as well as increases in unsold units."

In the first half of this year, the Korea Development Institute (KDI) and the Bank of Korea predicted that construction investment would increase by 2.3% and 2.2%, respectively, next year. However, due to the unexpected sharp rise in interest rates, actual growth is expected to remain in the 0~1% range. The Korea Research Institute for Construction Industry explained, "The National Assembly Budget Office (NABO) forecasted a 0.4% growth rate for construction investment next year in materials released this month, which is believed to partially reflect the recent rise in interest rates."

In particular, they suggested, "The biggest problem during times of increased volatility is the fear and anxiety caused by uncertainty itself," and recommended, "To respond to excessive investment contraction, the government needs to expedite regulatory easing and carefully ensure that housing and construction supply plans are not disrupted from a mid- to long-term perspective."

Regarding the government’s inability to implement active fiscal policies amid high inflation, they said, "The immediate tools available are limited to passive measures such as regulatory easing and tax reductions," but emphasized, "It is essential to sequentially implement clear supply direction plans and present a consistent direction to minimize the shock to the market."

Meanwhile, the U.S. Federal Reserve Board (Fed), which recently implemented three consecutive giant steps (raising the base interest rate by 0.75 percentage points each time), indicated its intention to maintain high interest rates through next year. Accordingly, the Bank of Korea is also likely to maintain its rate hike stance until the first half of next year.