[Real Estate Finance] Should You Try the 'Equity Accumulation Type' That Spreads House Prices Over 20-30 Years?

After Acquiring 20% Stake, Pay 10-15% Every 4 Years... Supply Starts in 2023
85㎡ Units Adjusted to 140-150% Median Income Standard... Enhancing Apartment Quality

[Asia Economy Reporter Lee Chun-hee] It appears that future homebuyers without housing will need to adopt more cautious strategies for purchasing their own homes. The government plans to introduce various housing types such as 'medium-sized public rental housing' and 'equity accumulation type' housing. The government will finalize this month a plan to significantly increase the supply area of public rental housing to provide units of 85㎡ (exclusive area), which is the size of 'national housing standard,' and from 2023, it will supply equity accumulation type housing that reduces the initial capital required for subscription and allows installment purchase of homes over a long period.

◆Own a Home by Paying Only 20% of the Price... 'Equity Accumulation Type'

The equity accumulation type housing will be supplied starting in 2023. At the initial sale, residents acquire only 20-25% of the land and building equity and then acquire additional equity every four years by 10-15%. After 20-30 years, they will fully own the house. The government plans to introduce this in complexes with good residency conditions, such as public sale units from public reconstruction and newly secured public land. Seoul Housing and Communities Corporation (SH Corporation) is currently operating the 'Equity Accumulation Housing Task Force (TF)' targeting unsold sites such as Seoul Medical Center and Cheonwang 2 and Munjeong. Other strong candidates within Seoul include Seongdui Village and Hagye Jugong 5 Complex.

The key issue is the cost associated with installment acquisition. To prevent a sharp rise in prices due to market price increases, the government plans to charge only an interest rate equivalent to regular deposit rates on the additional equity acquired. For the equity not yet acquired, residents will pay rental deposits and rent at the level of public rental housing.

According to an example presented by Seoul City, if the sale price is 500 million KRW, the winner needs an initial fund of 225 million KRW. This includes 125 million KRW for the initial equity (25%) and 100 million KRW as rental deposit for the remaining equity. Additionally, about 140,000 KRW per month in rent is paid. Subsequently, every four years, 75 million KRW (15%) plus interest calculated with regular deposit rates is paid to acquire more equity. However, loans are expected to be available only for the initial acquisition capital, not the entire initial fund.

According to the selection method disclosed by Seoul City in August, all units will be allocated by lottery. 70% will be special supply (40% for newlyweds, 30% for first-time homebuyers), and 30% will be general supply. Eligibility criteria include a maximum of 150% (160% for dual-income households) of the previous year's average monthly urban worker income, real estate assets below 215.5 million KRW, and vehicle assets below 27.64 million KRW. However, the income criteria apply only to the 10% second priority of general supply, and for other supply methods, the standard is lowered to 130%.

Since the government has not yet finalized these details, these criteria are likely to change. Recently, the government has been raising various income standards consecutively and is reportedly considering applying a point system to some parts of the general supply.

◆Consider Restrictions Such as Resale and Actual Residence Requirements

Those intending to purchase equity accumulation type housing should carefully calculate profits and losses. Although initial assets may be insufficient, this system benefits low-income earners and newlyweds with potential for long-term labor income growth. It also supports asset formation for residents over long-term occupancy and has sufficient public interest, which can partially disperse demand concentrated in sales or general jeonse markets. However, the government is likely to impose regulations such as resale restrictions and actual residence obligations to prevent 'lottery sales,' and the cost burden on buyers may be comparable to general subscription.

The resale restriction period for equity accumulation type housing is expected to be set at a minimum of 10 years. Even after the resale restriction period ends, if equity acquisition is not complete, sales require approval from the government or public corporations. The government states that after the resale restriction period, it will approve sales based only on whether the price is fair, but the sales proceeds must be shared with the public sector proportionally. Additionally, criticism arises that this is essentially no different from mortgage loans with high loan-to-value (LTV) ratios. Since prices are already lowered by the price ceiling system and considering rent, costs may exceed those of typical mortgage loans. Furthermore, since public equity and rental deposits are tied up as government and public corporation liabilities for a long time, there are concerns that actual supply volume may not be large.

◆Consider Living in a 32-Pyeong Unit Instead of Narrow Public Rental Housing

The government plans to finalize this month a plan to supply medium-sized rental housing of about 85㎡ (approximately 30 pyeong) within integrated-type public rental housing. Currently, only units under 60㎡ are supplied, but this will absorb rental demand from middle-class families with grown children or many members.

Integrated-type rental housing is a plan to combine various types such as permanent rental, national rental, and happy housing into one and is scheduled to be introduced in 2022. Initially, the plan was to unify the occupancy criteria to 56㎡ for families of four or more with income below 130% of median income, but with the introduction of medium-sized rental housing, the standard is expected to rise to 85㎡ and 140-150% of median income. Additionally, as part of improving perceptions of existing public rental housing, quality will be enhanced by providing better materials and more comfortable layouts.

The ruling party and government have also moved to amend laws to support this. On the 29th of last month, Representative Chun Jun-ho of the Democratic Party proposed an amendment to the 'Urban and Residential Environment Improvement Act' to expand the area of donated housing by public reconstruction associations to up to 85㎡, allowing medium-sized units.

The Ministry of Land, Infrastructure and Transport plans to pilot integrated-type rental housing in two locations: Gwacheon Knowledge Information Town S-10 Block (610 units) and Namyangju Byeollae A1-1 Block (577 units), and then begin full-scale supply from 2022. However, integrated-type public rental housing including medium-sized units is currently planned only as rental, with no plans for sale conversion. This raises questions about whether it can adequately meet the demand of middle-class homebuyers aiming to own homes.

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