Rising Construction Costs Shake Foundations of Public Housing in South Korea

Rising construction costs are disrupting the long-standing formula for housing supply in South Korea. The construction cost index reached a record high of 134.42 in March, marking the seventh consecutive month of increases. Compared to 2020, costs have surged by over 30% in just six years, driven by soaring material and labor costs. The issue extends beyond mere cost increases; it is shaking the very calculations behind public housing supply.

Construction sites are already facing unbearable pressures. Additional fees that reconstruction and redevelopment members must shoulder have ballooned into the millions of won in some projects. In areas with low profitability, these fees are exceeding the value of existing homes, raising concerns about a phenomenon known as 'fee inversion.' Even in the lucrative Gangnam area, where reconstruction projects are typically strong, delays are occurring due to difficulties in finding contractors willing to absorb the rising costs. As construction expenses climb, supply slows, creating a vicious cycle that exacerbates housing price instability.

The pricing standards set by the government are failing to keep pace with reality. The basic construction cost, which serves as the benchmark for the price ceiling on public housing sales, increased by only 2.12% in March. While actual construction costs have skyrocketed, public pricing has barely budged. As the gap between set prices and market realities widens, fewer developers are willing to build at those rates. Policies aimed at stabilizing supply by suppressing prices are paradoxically leading to a contraction in supply.

The implications of these rising costs extend beyond the profitability of construction companies. The burden of construction expenses translates into higher sale prices and rental rates, while project delays result in diminished supply. A decrease in supply heightens market instability. Ultimately, a significant portion of the cost burden falls on first-time homebuyers and young people, as rising expenses ripple through the housing market.

In response, the government is shifting to share the burden of public supply with the private sector. The Korea Land and Housing Corporation (LH) has decided to pursue a substantial portion of public housing through private participation this year. This may be a pragmatic choice to accelerate supply and reduce financial strain. However, the private sector operates on profit motives. If public interests are not adequately secured through contracts and management, the burden of public housing will inevitably shift back to low-income residents and young people.

More concerning is that despite construction costs reaching unprecedented levels, construction activity is contracting. Projects are stalling due to cost pressures, leading to reduced supply. Fears of supply shortages are once again fueling market instability. Public housing has served as a crucial safety net for young people, newlyweds, and low-income residents. If the public sector retreats due to rising costs, the first to suffer will be the housing stability of vulnerable groups.

The solution does not lie in ignoring reality. While acknowledging the rise in construction costs, unverified demands for increases must be filtered through public scrutiny. The construction cost standards set by the government also need to be adjusted to reflect current realities. Even when collaborating with the private sector, public interests must be managed more stringently. Additionally, exit strategies and support mechanisms for members and tenants struggling with rising fees must be established.

The surge in construction costs is an unavoidable reality. However, the public sector cannot withdraw from its responsibility to supply housing simply because costs have risen. Policies that aim to increase supply while suppressing prices, or that shift burdens to the private sector while expecting public accountability, are unlikely to endure. If the principles of public housing are compromised, the first to be affected will be the housing stability of low-income residents.