Relocation Loan Rates Nearly Double Despite Construction Firms' Guarantees... Financing Blocks Housing Supply

Government's policy mismatch: Rushing to boost housing supply
while tightening real estate financing

Critics say the government’s policy mismatch - rushing to increase housing supply while tightening real estate financing - is worsening funding shortages at construction sites. President Lee Jaemyung recently called for expanded financial incentives to speed up housing supply, but public funds have little room for additional support, and commercial banks are taking a conservative approach to construction-related lending. This is because financial authorities are curbing real estate lending while promoting productive finance directed toward advanced industries and other sectors. With funding from primary financial institutions drying up, developers are even scrambling to assemble loans in small chunks.

President Lee Jaemyung visits the Gyeyang Public Housing District in Incheon on the 20th with Minister of Land, Infrastructure and Transport Hong Jiseon, Korea Land and Housing Corporation (LH) President Lee Seonghun, and Incheon Mayor Park Chandae to inspect the site of a third-generation new town. Photo by the Cheong Wa Dae Correspondents' Photojournalists Pool.

According to the real estate industry on October 23, after commercial bank loans became unavailable for one commercial real estate development project, the developer sought funding from local unit agricultural cooperatives and mutual finance institutions. Because it had to form a syndicate of lenders by breaking the financing into small loans of 100 million or 500 million won per institution, the number of lenders participating in a single project reached 20 to as many as 40.

Housing redevelopment projects are also turning to local unit agricultural cooperatives to secure additional relocation loans, as the basic relocation loan limit is capped at 600 million won. For private housing construction, bridge loan rates - short-term loans to purchase land before obtaining permits, for example - have nearly doubled, rising from the high 2% to low 3% range annually to around 6%, even when large construction companies provide payment guarantees. Small and midsize construction companies do not even make it onto banks' review lists.

Industry participants agree that speeding up housing supply requires easing not only supplier financing, which funds construction companies, but also financing for end-users who buy homes. Under the presale system, in which construction is funded by buyers' down payments and interim payments, the borrowing capacity of homebuyers is directly linked to developers' ability to secure project financing.

"It is positive that the government has recognized that financing is acting as a barrier to homebuilding," said Kim Seonghwan, a research fellow at the Korea Research Institute for Construction Policy. "Under the presale system, support that expands the range of funds buyers can borrow must go hand in hand with support that lowers financing costs for developers and builders if projects are to proceed to groundbreaking."

It is also difficult for the government to further expand public financing support. The May 26 and August 13 measures have already included available tools such as construction loan support from the Housing and Urban Fund and expanded public guarantees from the Korea Housing and Urban Guarantee Corporation (HUG).

During the previous administration's two years in office, more than 50 trillion won a year was disbursed in demand-side loans, including Didimdol and Beotimmok loans, depleting the fund's available reserves. After the June 27 measures last year tightened loan requirements and expanded interest subsidies for commercial banks, those reserves have recently recovered to around 14 trillion won, the level considered normal for operations. The government believes that the fund needs to maintain about 14 trillion won in available reserves to operate without disruption, leaving little room to introduce measures that draw on additional fund resources.

Construction companies on the ground say government restrictions on household loans have led to a credit crunch in supplier financing. Even if construction companies are lent project funds, they can recover the money only after homebuyers pay the purchase price, often using final-payment loans, once construction is complete. Critics say that as financial authorities tighten mortgage loans, final-payment loans, and jeonse deposit loans, end-users' purchasing power has fallen and sales risks have risen.

As rising construction costs, higher sale prices, and weakening regional demand have compounded the problem, banks have become even more conservative in assessing project viability and are reluctant to provide project financing, creating a vicious cycle. "When the government tightens household lending, end-users cannot secure financing. With concerns about unsold homes undermining project viability, banks are also reluctant to lend to builders or developers," said an executive at a major construction company. "Financing is flowing only to a small number of projects with proven viability."

"Unless you are wealthy and can pay in cash, you cannot buy an apartment or even rent one," said the head of a regional construction company. "The profit from building one apartment complex in Seoul is comparable to that from building 10 in the regions, so financial institutions do not even consider regional projects."

As funding dries up, the construction industry's overall financial health is also deteriorating. According to the Construction Association of Korea, domestic construction investment totaled 265 trillion won last year, down 9.7% from the previous year. It fell a further 1.2% year over year in the second quarter of 2026, marking nine consecutive quarters of contraction. The number of marginal construction companies unable to cover interest expenses with operating profits rose 2.8-fold, from 62 in 2021 to 173 last year.

This content was produced with the assistance of AI translation services.