GOYANG, South Korea (Reuters) - Five years after the global financial crisis, South Korean construction workers are feeling the pinch more than ever as they shoulder a mountain of debt from a real estate bust that has cast a long shadow on the country’s growth prospects.
Facing the specter of bankruptcy, some construction firms persuaded their staff to take up loans to mop up unsold apartments.
“There was pressure. There’s nowhere else in the world where there’s a parallel to these practices,” said a construction worker, who declined to be identified due to the sensitivity of the matter.
“Loyalty and hierarchy is still strong in South Korea and especially in the construction companies which are run like the armed forces,” he said, adding that his employer Poonglim Industrial Co Ltd had asked him to buy two apartments, which meant he had to borrow 800 million won ($712,800).
A public relations official at Poonglim, which completed its court receivership in April, would only say employees had taken loans on behalf of the company and interest payments were being paid by Poonglim. “We are in discussions with debt creditors to resell all of these apartments with discounts to resolve the matter,” he said.
Such loans represent just a small part of a big problem in Asia’s fourth-largest economy, as outstanding household debt has climbed to almost $1 trillion.
South Korea’s household debt has doubled over a decade to levels where debt-to-income ratios are in excess of those in the United States before the sub-prime crash in 2008.
Hit by debt and the prolonged property market slump, January-March private consumption fell for the first time in five quarters as Koreans kept a tight hold on their wallets.
Other data also indicates the economy once dubbed the “Miracle on the Han River” because of its rise from poverty to rich nation status in just one generation may be drying up.
Gross domestic product grew 2 percent in 2012 and the Bank of Korea has forecast expansion of 2.6 percent this year.
President Park Geun-hye, who took office in February, has implemented a household debt relief program. But the 800 billion won put into the scheme is far less than the 18 trillion won that she promised in her election campaign.
The original proposal for what Park dubbed the “National Happiness Fund” was to provide debt relief for 3.2 million people, but the smaller amount will see just 324,000 qualify.
Park, the daughter of Park Chung-hee, the autocratic ruler who oversaw South Korea’s stellar industrialization in the 1960s and 1970s, pledged an “Era of People’s Happiness” in her campaign.
Park Wong-gap, a property specialist at South Korea’s Kookmin Bank, described the measures as “morphine” for a sick body, and would not solve fundamental problems of a weak domestic economy.
South Korea’s construction industry makes up about 6 percent of the economy and employs more than a million people.
An office worker at Byucksan Engineering & Construction Co Ltd, Kim Keon-hoon said he was also pushed in 2008 to buy an unsold 800 million won two-bathroom, four-bedroom apartment in the Ilsan suburb outside Seoul as his employer teetered on the edge of bankruptcy.
Mortgages are commonly taken on by workers to provide cash-strapped companies with liquidity, and interest payments are usually shouldered by the firms.
The purchase has saddled the father of two with debts of 500 million won and monthly interest payments of 3 million won that he cannot repay. Kim and other employees say they were coerced to buy and have taken the company to court.
This was the second time Kim had been pushed by his company into buying an unsold apartment, the first was during the 1998 Asian financial crisis, still known as the International Monetary Fund crisis in South Korea.
“During the IMF crisis, many companies raised money by making their employees buy apartments ... so when the company proposed that we do it again, it wasn’t the kind of atmosphere where anyone could object,” Kim told Reuters in the dusty shell of an apartment in a high-rise block on the edge of Seoul. He took on a mortgage for fear his career would suffer.
When asked about workers’ claims that they were forced to buy unsold properties, a Byucksan official said the company was sympathetic to the plight of its staff. “That was a practice in the past and it can now only be resolved by reselling them. There is nothing we can do to manage the problem as the company is still under receivership.”
The Korean Federation of Construction Company Unions, an umbrella union grouping, estimated in February that members working for five firms placed in receivership had been told to buy a total of 1,047 unsold apartments from their employers worth a total of 454 billion won.
“We know our workers are in pain and we all hope these houses will be sold again soon so we can get rid of that pain,” said the official at Byucksan, who requested anonymity as he is not authorized to speak to the media.
Due to oversupply and lack of affordability, apartment prices in the Seoul metropolitan area have fallen 14.7 percent to end-2012 from July 2008, according to Moody’s Investors Service. The slump is killing off builders.
“There is a structural problem and another liquidity crisis could happen any time to construction companies unless the real estate market recovers,” said Kookmin Bank’s Park.
Kookmin’s own data shows that house prices fell by their fastest annual level in four years in April with a 0.76 percent decline. The bank’s data is considered an official indicator of South Korea’s housing market conditions.
The woes of the construction sector aren’t just confined to smaller firms.
Combined first-quarter operating losses at the top nine South Korean construction firms, including giants such as Hyundai Engineering & Construction Co Ltd and Samsung C&T Corp, were 480.9 billion won, a compilation by online financial news service FnGuide showed.
Among the top 100 builders in South Korea, 21 firms including Ssangyong Engineering & Construction Co Ltd and Kumho Industrial Co Ltd are under court receivership or debt-restructuring programs, according to the Construction Association of Korea.
Until the construction sector revives, some parts of the industry are likely to put pressure on employees to buy, banking on the same spirit of self-sacrifice that saw people sell their jewelry to help the government pay back a $57 billion loan from the IMF during the Asian crisis in the 1990s.
The 44-year-old Kim, still with Byucksan and living in a smaller apartment in the same town, is struggling to raise and educate a family under the weight of huge debts that have destroyed his lifetime savings.
“The loans are still outstanding and that is what has hurt our workers the most. I have never wanted to come and live in this apartment.”
($1 = 1122.3250 Korean won)
Additional reporting by Choonsik Yoo; Editing by David Chance and Jacqueline Wong