Guarantee fund at the Korea Housing & Urban Guarantee Corp. (HUG), a state-run institution that provides housing completion guarantees to construction firms and issues warranty on housing purchase loans to individuals, is rapidly depleting due to unexpectedly high supply of new apartments in South Korea, raising concerns that some construction companies would not be able to complete the construction of their new flats due to a lack of the state’s guarantees.

According to the Ministry of Land, Infrastructure, and Transport in charge of real estate affairs on Wednesday, guarantee balance at HUG has already reached 200 trillion won ($176.2 billion), leaving less than 7 percent, or 15 trillion won, of HUG’s total 215 trillion won guarantee fund available for the rest of this year.

Multiple industry sources note that HUG’s guarantee fund is shrinking rather fast because of higher than expected supply of new homes. An unnamed official from the land ministry also said that unlike its initial prediction, construction firms have not reduced the supply of new apartments in the first half of this year.

According to the land ministry, new apartment supplies have reached 200,000 units in the first half of 2016, dropping only 5.3 percent from a year ago when supplies were at a historically high level. The ministry and HUG have anticipated that about 340,000 units of new apartment would be offered this year and have managed the cap on the guarantee fund based on such a projection.

Concerns are now growing that construction firms that generally sell new apartments before they are complete in Korea would not be able to parcel out new flats as they would not be able to receive guarantee from HUG for housing completion.

In Korea, home buyers also borrow a chunk of money from lenders in groups for middle payments for new homes that are still under construction at the guarantee of HUG. Middle money accounts for a large share of a home price and is separate from the initial contract fees and final payments that are usually paid with buyers’ own money.

In the second half of this year, up to 250,000 units of new apartments are expected to be put up for sale in the real estate market. However, with HUG’s guarantee capacity drying up, industry observers note that a number of construction firms would postpone new apartment sales to after next year.

Construction industry officials urged the government and HUG to up the guarantee fund before it is too late. The unnamed official at the land ministry said the ministry will make sure that guarantees are well-managed and that it will talk with the Ministry of Strategy and Finance to seek measures to expand HUG’s capital.

By Moon Ji-woong

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]