[Beginner's Guide] 'Equity Accumulation Housing' Introduced from 2023... Careful Profit and Loss Calculation Is Essential

Advantages of Low Initial Cost Burden
Risk of Profit Sharing When Selling Before Equity Purchase Completion

Equity Acquisition Over 20-30 Years
Requires Rental Deposit in Addition to Initial Capital

Free Trading Possible After Resale Restriction Period
Likely Method of Sharing Public and Private Benefits Based on Equity

[Asia Economy Reporter Lee Chun-hee] As the government announced plans to start selling 'equity accumulation housing' from 2023, beginning with highly preferred urban sites such as publicly owned land and public redevelopment project contributions among newly supplied housing, interest in equity accumulation housing is rising.

On the 28th, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated at the '9th Real Estate Market Inspection Meeting' held at the Government Seoul Office the previous day that equity accumulation housing is "expected to be available for sale from 2023." Since it was first mentioned in the August 4th real estate measures, a concrete roadmap is gradually becoming visible. Seoul City is also known to plan to supply 17,000 units by 2028.

Equity divided and purchased over 20-30 years... Unacquired shares charged rent at time deposit interest rate + public rental level

Equity accumulation sale housing is a housing subscription method where the buyer initially acquires only 20-25% of the land and building equity at the time of first sale and then acquires 10-15% of the equity evenly every four years after moving in. Through this process, the buyer fully owns the house after 20-30 years.

Currently, with the housing loan-to-value (LTV) ratio limit set at 40% (20% for properties over 900 million KRW) in speculative overheated districts such as Seoul, the burden of preparing 400 to 500 million KRW within three years for typical sales is significantly reduced. The government plans to introduce this in complexes with good residency conditions, such as public reconstruction public sale units and newly secured public housing sites.

However, concerns arise about what happens if the price of the unacquired equity suddenly surges. Recently, in the case of public rental housing with a 10-year conversion period priced based on appraised value, controversies over high prices emerged as nearby housing prices soared after moving in.

Regarding this, the government currently plans to raise the price of additional equity acquired over a long period only by the time deposit interest rate level, considering the increased burden on buyers due to price rises at the time of sale conversion, so a large increase in burden like the 10-year conversion is unlikely.

Also, the unacquired equity will be held by public entities such as the government, local governments, Korea Land and Housing Corporation (LH), and Seoul Housing and Communities Corporation (SH). For this public equity, rent will be charged at a level lower than market price, similar to public rental housing like Happy Housing.

At first move-in: initial equity + rental deposit... LTV limit applies only to initial equity

On the morning of August 4th, before the announcement of the metropolitan housing supply measures held at the Government Seoul Office, Deputy Prime Minister for Economy Hong Nam-ki is greeting. On the left is Minister of Land, Infrastructure and Transport Kim Hyun-mi, and on the right is Acting Mayor of Seoul Seo Jeong-hyeop. Photo by Kang Jin-hyeong aymsdream@

After the August 4th measures, according to the operational roadmap for equity accumulation housing presented by Seoul City, it works like this: If you purchase a house priced at 500 million KRW, the immediate cost required is 225 million KRW. Setting the initial equity acquisition rate at 25%, the acquisition amount needed is 125 million KRW. The remaining 100 million KRW is a rental deposit for quasi-lease residence until acquisition is complete. Additionally, a monthly rent of about 140,000 KRW will be charged.

Another important factor is the LTV. Since this is a sale housing in the speculative overheated district of Seoul, an LTV of 40% applies. However, loans are made not on the total sale price but on the initial acquisition amount of 125 million KRW. In other words, instead of the usual interim payment loan amount of 200 million KRW for a 500 million KRW house, only 50 million KRW can be borrowed. Therefore, at least 175 million KRW of self-funding is required.

If it is difficult to prepare a lump sum, the rental deposit can be lowered to as low as 45 million KRW. In this case, the initial funding amount reduces to 120 million KRW. However, the monthly rent increases to 310,000 KRW, which means disposable income decreases accordingly.

After preparing this initial fund and moving in, the remaining 75% of the sale price is paid every four years in installments of 75 million KRW (15%). Paying five times over 20 years completes full home ownership. However, as mentioned earlier, interest at the time deposit rate level will be added to the principal.

Plan to supply entirely by lottery... Must meet income and asset criteria

Method for Selecting Residents of Equity Accumulation Housing Released by Seoul City After the August 4 Real Estate Measures Announcement (Provided by Seoul City)

Then, how will residents be selected for equity accumulation housing? According to the plan disclosed by Seoul City last August, since this is also a public sale, existing public sale criteria such as income and assets are expected to apply. Seoul City plans to allow applications for households with up to 150% of the previous year's average urban worker monthly income (160% for dual-income), real estate assets below 215.5 million KRW, and automobile assets below 27.64 million KRW. Theoretically, households with an annual income of up to 106.6 million KRW for a three-person dual-income household and 119.55 million KRW for a four-person household can apply.

However, since these income criteria are close to the maximum upper limit, it will be difficult to win. Seoul City plans to allocate 70% of the total units to special supply and 30% to general supply. Of the 70% special supply, 40% will be for newlyweds and 30% for first-time homebuyers.

Among the general supply, a 20% first-priority supply will introduce income limits of 130% (140% for dual-income). For dual-income households, a three-person household with a monthly income of 7.78 million KRW (annual 93.32 million KRW) and a four-person household with a monthly income of 8.72 million KRW (annual 104.6 million KRW) can apply.

Households exceeding these criteria can only compete for the 10% of units allocated to a lottery with first-priority unsuccessful applicants, so for current homeowners, it may be a kind of false hope as they can only apply under the lottery system.

However, these details are still 'drafts' and may change during the concretization process. Since the government has not finalized detailed plans related to equity accumulation housing, changes may occur as the plan develops.

First, regarding income criteria, since the government has recently been easing income standards consecutively, considering that the criteria were disclosed last August, higher income criteria may apply at the actual sale time. The government is also reportedly considering applying a point system for some of the general supply.

Resale ban and actual residence regulations pose 'risks'... Upon sale, profits shared with public according to equity

Seoul Medical Center Gangnam Branch. Currently, Seoul Medical Center and Seocho Seongdwi Village are considered strong candidates as sites for equity accumulation housing. Photo by Mun Ho-nam munonam@

Even if one passes these hurdles and succeeds in subscription, there are concerns it may become a 'chicken rib' (something of little value). This is because the government, conscious of 'lottery sale' controversies, is likely to introduce resale restrictions and mandatory residence periods. A minimum 10-year resale restriction period is highly probable.

Even after the resale restriction period ends, if equity purchase is not complete, selling may be difficult. Unlike rental where majority equity holders can decide, selling requires unanimous consent of all equity owners. If the public still holds equity, they may oppose the sale.

The government states that after the resale restriction period ends, it will not intervene in disposal. If the entire house is sold to a third party, the government will only verify whether the price is fair according to market value and then consent to the sale. However, the sale proceeds must be shared with the public according to the equity ratio.

Market reactions to equity accumulation housing are somewhat mixed. It is expected to help low-income groups and newlyweds who lack assets but have potential for long-term labor income growth, supporting asset formation for residents over long-term residence and sufficiently ensuring public interest, thereby partially dispersing demand concentrated in sales or general rental markets.

On the other hand, considering rent and other costs, expenses may exceed housing loan interest, and with resale restrictions and mandatory residence regulations, risks are inevitably high. Also, with prices already lowered due to the price ceiling system, the policy effect may be limited, and public institutions may find it difficult to supply many units as they must keep ownership equity tied up as long-term liabilities.

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