Govt. cannot control construction costs artificially

President Yoon Suk Yeol pledged to lift restrictions on redevelopment and rebuilding projects at a debate on people’s livelihoods earlier this year when the administration announced a set of housing supply measures dated Jan. 10. The gist was to effectively exempt safety examination procedures concerning the rebuilding of apartment complexes 30 years old and above. The government announced in June that REITs (real estate investment trusts) would be revived after 10 years. Similarly, it released a series of plans in August, including a special bill to facilitate reconstruction and redevelopment projects, the Aug. 8 housing supply policy, and rental housing programs that companies run for 20 years or longer.

Arguably, the government felt the need to increase housing supply to cool down the housing market where prices were on an “abnormal” rise centering around the capital area.

However, analysts argue that there is a missing piece from a series of these government measures – which is construction cost. After all, they are likely to end up being empty words if the private sector does not respond accordingly despite the government’s efforts. What holds back the private sector is soaring construction costs.

As of last year, the construction cost index issued by the Korea Institute of Civil Engineering and Building Technology rose to 127.90 compared to the annual average for 2020, which was set at 100. The figure even exceeded 130 for five months running from February to June this year. In August, it also rose to 129.71. The increase in construction costs is causing conflicts between housing partnerships and general contractors in redevelopment and rebuilding projects across the country.

Such an obvious issue must have made the government mull it over. Earlier this month, it came up with a series of construction cost measures, including aid for the importation of cement. Domestic cement prices increased 40 percent from 78,800 won per ton in 2021 to 112,000 won per ton last year. The government released another “supply-side” solution, thinking that cement imports would slow down the rising prices.

This begs the question: Why haven’t general contractors opted for imported cement previously? Simply put, there is no perceivable benefit. Unlike chips, cement is a bulky material that requires massive freight costs. Presumably, China is a likely importer due to its geographical proximity, but it does not seem like an economically feasible option to make even if the government facilitates permit and approval processes for cement storage facilities and logistics systems.

Ultimately, it is an either-or issue. Cement may not be imported the way the government intends. Otherwise, low-quality cement can be supplied from overseas so that construction costs can go down despite high freight costs. To prevent this issue, the government plans to enhance quality certification for imported cement for the sake of safety. Having said that, it is not a simple issue to tackle, given that cement would have to be imported in such a considerable volume that it can make a difference in the domestic cement market.

Thus, it all comes down to target setting in terms of government policy-making. That is, the government must think carefully before it aims to make artificial adjustments to construction costs that have already risen. It is different from importing Spanish eggs during the outbreak of avian influenza or buying Chinese cabbage to control domestic cabbage prices. What if construction costs would not go down even after the import of cement? It would not be able to simply demand a price cut just as it calls on mobile carriers to lower phone bills.

It is more desirable for the government to focus on finding ways to speed up housing supply efficiently. For example, it can consider making better use of urban dispute mediation committees that each local government has put in place to address conflicts between housing partnerships and general contractors as they exist in name only. It is no surprise that there is disagreement between general contractors seeking to make more money and housing partnerships that want to make projects more profitable and affordable. They are bound to be sharply divided when construction costs come as a heavy burden.

If the government or a legitimate delegate agent comes forward to mediate, it may be easier to reach the goal of supplying houses in urban areas in the not too distant future than expected.