The South Korean government has repeatedly stressed expanding housing supply, but a wave of construction industry bankruptcies is only accelerating. Closure filings by general construction companies totaled 650 in the January-September period this year, the highest level in 20 years since 2006. That is up 33.7% from 486 in the same period last year.
Including small and mid-sized specialty contractors, the situation is even more serious. The number of construction companies that filed for closure during the same period reached 3,274, the highest in 17 years since 2009 (3,340), immediately after the global financial crisis. The figures are compiled through the Ministry of Land, Infrastructure and Transport’s Construction Industry Knowledge Information System.
The sharp rise in construction costs is cited as the primary driver behind the increase in closures. According to the Korea Institute of Construction Industry Research, the Construction Cost Index stood at 138.74 in August, up 6.0% from a year earlier, setting a new all-time high. Over the same period, producer prices for general rebar rose 11.5% and the market price index jumped 18.3%, increasing cost burdens starting from basic processes such as structural framing.
The structure in which cost increases are not properly reflected in construction fees also pressures profitability. The Construction Association of Korea said that from January 2020 through the first half of this year, the construction cost index rose 38.9%, double the consumer price index increase of 19.9%. As a result, the construction industry’s net profit margin stands at 1.8%, less than half of the manufacturing sector’s 4.9%.
Indeed, not a few projects have been undertaken at a loss. The Korea Institute of Construction Industry Research surveyed 2,492 sites completed between 2022 and August last year and found that loss-making projects accounted for 43.7%. Conditions were analyzed to be worse for companies outside the Seoul metropolitan area and for small and mid-sized builders.
Financial health indicators are also deteriorating rapidly. Among externally audited construction companies, marginal firms with an interest coverage ratio below 1 for three consecutive years surged 2.8-fold from 62 in 2021 to 173 last year. This means more companies cannot even cover interest payments with operating profit.
The cash recovery channel is also blocked. According to Ministry of Land, Infrastructure and Transport data, unsold homes nationwide totaled 69,134 units in August, up 2,521 units (3.8%) from a year earlier. As homes remain unsold even after completion, construction payments are delayed and cash liquidity is drying up in a vicious cycle.
Industry sentiment is far below the benchmark. The Construction Business Survey Index (CBSI) stood at 73.2 in September, with overwhelmingly more companies viewing conditions as below 100 than above it.
Note: Closure filings are based on the Ministry of Land, Infrastructure and Transport’s Construction Industry Knowledge Information System; unsold homes are based on the Ministry of Land, Infrastructure and Transport; other indicators are based on Korea Institute of Construction Industry Research and Construction Association of Korea data.
The fallout spreading to the job market is also significant. Last month, construction employment stood at 1,926,000, down about 260,000 from the 2022 peak of 2.12 million. As new groundbreakings decline and sites halt, temporary and day laborers are being hit first, given the construction industry’s heavy reliance on short-term workers.
According to an analysis of the Economically Active Population Survey by Statistics Korea, temporary and day workers totaled 5,727,000 in the third quarter of this year, down 95,000 from a year earlier, the lowest for a third quarter in 31 years since 1995. Day laborers fell to 833,000, an all-time low, with the decline in construction day laborers (-28,000) accounting for 74.6% of the total decrease.
The construction industry points to the gap between government policy and on-the-ground reality as a problem. Although real estate project financing (PF) regulations have been eased, banks are passive in supplying funds, citing loan management guidelines. Analysts say large companies are enduring with diversified portfolios including overseas projects and urban renewal, while mid-sized and small companies heavily dependent on local housing contracts face even their additional loan channels blocked, deepening polarization.
Park Chul-han, a research fellow at the Korea Institute of Construction Industry Research, said, “Mid-sized and small construction companies outside the top 50 in contract ranking often hold on because it is difficult to match costs, and this is showing up in actual closure figures.” He added, “There is a need to boldly ease regulations in markets where supply can realistically be delivered quickly.” He continued, “No matter how large the project or how private the site, construction can only proceed if it is profitable,” and added, “We need to adjust to realistic supply targets rather than unrealistic figures like a 1.5 million-unit supply.”
Critics say that for the government’s supply expansion stance to take effect, realistic ordering costs and expanded funding channels must go hand in hand. Unless cost burdens are resolved, increasing supply volume will be difficult to translate into groundbreakings, and closures and employment cuts could expand first.