Central Bank Warns of Housing Bubble

The Bank of Korea is warning of a housing oversupply and recommended that developers cut their investments in new residential projects.

Advertisement

As the population stagnates due to a low birthrate, Korea could end up suffering a collapsing real estate bubble like Japan's, the BOK said.

In a report published Wednesday, the central bank said investment in construction accounts for 15 percent of Korea's GDP. In advanced countries where per-capita income exceeds US$30,000 a year, construction investment accounts for just eight to 10 percent of GDP, and in countries with $25,000 to $30,000 like Korea for around 10 percent.

The BOK said Korea's proportion is so high because construction investment has been used aggressively as part of pump-priming measures.

But demand for homes is declining steadily.

In Japan, failed investment in the construction industry in the late 1980s to the 1990s resulted in a surge in the number of empty homes and mass bankruptcies of builders.

The key home-buying demographic between the ages of 35 and 54 has been shrinking since 2012, and the economically productive population is expected to start dwindling next year.

According to Statistics Korea, demand for new homes in Korea has been below 340,000 units since 2012, but 460,000 new homes were built in 2015 and another 520,000 are expected to be completed this year.

BOK Governor Lee Ju-yeol cited the potential slowdown of the construction industry as one uncertainty facing the economy. Economists also warn that any signs of an overheating real estate market must be monitored as it is often attributed to real estate speculation.