[Editorial] Construction-led growth

With exports on a downward spiral, Korea’s economic growth is increasingly being led by the construction industry. Policymakers need to take action to correct this abnormal growth pattern.

A report released by the Korea Institute for Industrial Economics and Trade showed that the construction sector accounted for 51.5 percent of the country’s economic growth in the second quarter.

Of the economy’s 3.3 percent expansion in the April-June period, 1.7 percentage points came from brisk construction investments.

The construction industry’s contribution to economic growth averaged 40.1 percent during the one year from September last year. This is clearly abnormal in light of the economy’s growth trend in recent years. Between 2000 and 2014, the construction industry’s contribution to economic growth was a mere 5.3 percent on average.

Housing construction has led the recent growth in construction investment. Investment in home construction rose 22 percent on average during the past four quarters, double the increase rate of aggregate construction investment.

The concentration of construction investment in the housing sector is unwholesome as it fuels the explosive growth of household debt and could create a housing bubble.

Korea’s household debt rose to a record 1,257 trillion won ($1.12 trillion) in June, fueled by a rapid increase in mortgages.

The International Monetary Fund said in a report published in May that the high level of household debt does not pose a systemic risk to the Korean economy.

However, large household debt sets in motion a vicious circle, as households have to divert a large portion of their income to service their debts. The annual interest burden on households has exceeded 40 trillion won. The economy would grow much faster if only half of the interest payments were channeled to consumption.

The household debt problem is expected to worsen as the central bank of the United States is likely to raise its interest rate within this year.

Brisk home construction is cause for concern as it could create a housing bubble. One factor that helped unleash the recent housing boom was the government’s easing of regulations on housing transactions. But this has provided room for speculators to maneuver.

Speculation has helped the housing market come out of the doldrums. But it has also caused it to overheat. The government needs to cool the housing market to keep the housing bubble from bursting and lower the economy’s overdependence on the construction industry.

At the same time, it needs to boost domestic demand by creating jobs and increasing the incomes of vulnerable households.