By Choi Sung-jin
If policymakers push up economic growth rate through creating a building boom, that may appear good for now but its adverse effects will seriously hurt the economy later, a study showed Friday.
"Looking at previous examples in which construction investment bolstered economic growth, the artificial real property boom often led to a plethora of unsold apartments and a chain of bankruptcies among builders," said the report written by three analysts of IBK Investment and Securities.
If the growth rates of industries other than construction remain sluggish next year and the housing market falls into a slump, it will pull down the growth of the overall economy to a worrisome extent, the report added.
The Bank of Korea has recently estimated that the nation's economy in the third quarter grew 2.7 percent from a year ago.
The third-quarter gross domestic product also marked the growth of 0.7 percent from the preceding three months, and the contribution of construction investment was 0.6 percent, indicating the sector almost singlehandedly led economic growth. Or, in other words, the nation's economy might have recorded a negative growth had it not been for construction, it said.
Seen from the recent trends of GDP growth rate, the growth rates of sectors other than construction have been lower than the overall growth rate. Past examples show that it is unusual for these growth rates to hover below the overall growth rate, which happened only when policymakers used artificial economic-boosting measures, the report said.
"Since 1970, there have been two major cases when the overall GDP growth rate stood above the growth rate of industries other than construction _ one was the immediate aftermath of the first oil shock in the 1970s and the other was during the 1988-1991 period under the Roh Tae-woo administration," said Chung Yong-taek, who led the research. "Both cases were the results of artificial economic stimulus."
According to the report, when the Korean economy showed signs of slowdown before and after the first and second oil shocks, the government prevented its free-fall by expanding investment in construction. In 1980, the Chun Doo-hwan administration announced a plan to build five million homes in a decade, and in 1988, the Roh Tae-woo government also said it would build two million houses. Chun's plan fizzled out but Roh pushed ahead with his project, which helped improve economic growth.
"The sharp increase of the housing supply, though, led to declines of home prices starting in 1991," said Chung. Continuous housing construction resulted in a supply glut leaving numerous unsold apartments and aggravating the financial conditions of most builders, he added.
In the mid-1990s, many construction companies went bankrupt, and the domestic property market experienced a near crash during the 1997-98 Asian financial crisis.
"Given that the housing market cannot be propped up for long through artificial means, Korea's economic growth rate that depends on construction investment is likely to fall further," Chung said. "If the housing market weakens next year, other sectors need to improve their performances to maintain economic growth at the present level, but it's difficult to expect such a situation to happen considering the sluggish capital spending by businesses at home and resurgent trade protectionism abroad."
Nor can the nation expect the investment in construction will continue to be brisk like now, considering that Korea is reeling from a combined household debt of 1,300 trillion won ($1.135 trillion), the researcher said.
"Despite the weak financial situations facing individual households, the housing boom has been able to continue thanks mainly to the low interest rate," Chung said. "Yet Korea can hardly pull down its interest rates any more, and that will begin to dampen the housing boom."
If policymakers push up economic growth rate through creating a building boom, that may appear good for now but its adverse effects will seriously hurt the economy later, a study showed Friday.
"Looking at previous examples in which construction investment bolstered economic growth, the artificial real property boom often led to a plethora of unsold apartments and a chain of bankruptcies among builders," said the report written by three analysts of IBK Investment and Securities.
If the growth rates of industries other than construction remain sluggish next year and the housing market falls into a slump, it will pull down the growth of the overall economy to a worrisome extent, the report added.
The Bank of Korea has recently estimated that the nation's economy in the third quarter grew 2.7 percent from a year ago.
The third-quarter gross domestic product also marked the growth of 0.7 percent from the preceding three months, and the contribution of construction investment was 0.6 percent, indicating the sector almost singlehandedly led economic growth. Or, in other words, the nation's economy might have recorded a negative growth had it not been for construction, it said.
Seen from the recent trends of GDP growth rate, the growth rates of sectors other than construction have been lower than the overall growth rate. Past examples show that it is unusual for these growth rates to hover below the overall growth rate, which happened only when policymakers used artificial economic-boosting measures, the report said.
"Since 1970, there have been two major cases when the overall GDP growth rate stood above the growth rate of industries other than construction _ one was the immediate aftermath of the first oil shock in the 1970s and the other was during the 1988-1991 period under the Roh Tae-woo administration," said Chung Yong-taek, who led the research. "Both cases were the results of artificial economic stimulus."
According to the report, when the Korean economy showed signs of slowdown before and after the first and second oil shocks, the government prevented its free-fall by expanding investment in construction. In 1980, the Chun Doo-hwan administration announced a plan to build five million homes in a decade, and in 1988, the Roh Tae-woo government also said it would build two million houses. Chun's plan fizzled out but Roh pushed ahead with his project, which helped improve economic growth.
"The sharp increase of the housing supply, though, led to declines of home prices starting in 1991," said Chung. Continuous housing construction resulted in a supply glut leaving numerous unsold apartments and aggravating the financial conditions of most builders, he added.
In the mid-1990s, many construction companies went bankrupt, and the domestic property market experienced a near crash during the 1997-98 Asian financial crisis.
"Given that the housing market cannot be propped up for long through artificial means, Korea's economic growth rate that depends on construction investment is likely to fall further," Chung said. "If the housing market weakens next year, other sectors need to improve their performances to maintain economic growth at the present level, but it's difficult to expect such a situation to happen considering the sluggish capital spending by businesses at home and resurgent trade protectionism abroad."
Nor can the nation expect the investment in construction will continue to be brisk like now, considering that Korea is reeling from a combined household debt of 1,300 trillion won ($1.135 trillion), the researcher said.
"Despite the weak financial situations facing individual households, the housing boom has been able to continue thanks mainly to the low interest rate," Chung said. "Yet Korea can hardly pull down its interest rates any more, and that will begin to dampen the housing boom."
