3rd Quarter Construction Investment Down 5.7%... "Proactive Response Needed to Political Instability"

Residential Construction Declines for Third Consecutive Quarter
Impact of Decreased Starts from 2022 to 2023

Construction investment in the third quarter decreased by 5.7% compared to the same period last year. Residential building investment declined for the third consecutive quarter. The domestic demand slump caused by the construction investment downturn is expected to continue into next year.

The Hwaseong International Theme Park Complex Development Project is a plan to build a futuristic advanced complex city on a 4,189,000㎡ (1,270,000 pyeong) site within Songsan Green City, Hwaseong-si, Gyeonggi Province. The photo shows the construction site of the international theme park residential complex within Songsan Green City. Photo by Yongjun Cho jun21@

On the 14th, the Construction Industry Research Institute stated in its trend briefing that the construction investment growth rate in the third quarter of this year decreased by 5.7% year-on-year, resulting in a GDP growth contribution of -0.9 percentage points. Construction investment increased by 1.6% year-on-year in the first quarter and decreased by 0.5% in the second quarter, but sharply contracted in the third quarter.

Looking at the trend of construction investment growth rates by process, both residential and non-residential buildings decreased in the third quarter following the second quarter. Residential buildings fell by 8.8% year-on-year, and non-residential buildings decreased by 7.3%. Civil engineering investment in the third quarter increased by 3.3%.

In particular, residential building investment declined for three consecutive quarters, and the downward trend is expected to continue into next year. Residential building investment decreased by 1.0% in the first quarter, 4.8% in the second quarter, and 8.8% in the third quarter, with the decline gradually widening. This is the first time in two years since 2022 that residential building investment has decreased for more than three consecutive quarters.

Researcher Park Cheol-han of the Construction Industry Research Institute explained, "The poor performance of residential building investment this year is due to the decrease in housing starts in 2022-2023 amid the real estate market downturn, and the fact that most apartment constructions, which were pre-sold around 2020 when housing prices surged, will be completed by early 2024, leading to an overall reduction in construction volume."

Non-residential building investment decreased by 1.3% in the second quarter and further declined by 7.3% in the third quarter. This is the first time in four years since 2020 that it has decreased for more than two consecutive quarters. The increase in large-scale semiconductor construction projects from 2021 to 2023 and the slump in the commercial building market due to real estate project financing (PF) issues contributed to this contraction. Researcher Park analyzed, "Considering that past periods of non-residential building investment downturns typically lasted about 3 to 4 quarters, recovery is possible in the second half of next year."

Civil engineering investment increased for three consecutive quarters due to GTX construction projects but is likely to decline after mid-next year. Researcher Park said, "Recently, civil engineering construction orders have also shown favorable performance mainly in public projects, which has partially alleviated the sluggish construction market," adding, "However, with the central government's SOC (social overhead capital) budget cut by nearly 1 trillion won this year, it will be difficult for the civil engineering investment growth trend to continue."

The decline in construction investment not only hampers GDP growth but also reduces jobs, affecting domestic demand stagnation. According to Statistics Korea, the number of employed persons in the construction industry has decreased for seven consecutive months from May to November, influenced by the reduction in building construction volume since the second quarter.

The domestic demand slump caused by the decline in construction investment is expected to persist next year. There are also calls for proactive measures such as supplementary budget formulation, as political instability could worsen the construction investment downturn. Construction investment accounts for approximately 15% of GDP, and investing 1 trillion won in the construction industry creates about 15,000 jobs.

Researcher Park stated, "While strengthening monitoring to prevent a decline in domestic industrial competitiveness, it is necessary to ensure that the construction projects scheduled for the first half of 2025 are properly ordered," and added, "In a situation of extremely high political uncertainty, proactive discussions on supplementary budgets should be held to respond to the contracted real economy."