Reflecting Relocation Loan Interest and Material Cost Increases in Sale Prices... Up to 4% Rise [6.21 Real Estate Measures]

Construction Cost Reflection Items Increased from 4 to 6

Despite HUG's High Price Review

Material Cost Increase Reflected

Criteria for Selecting Market Comparison Complexes

Revised from 20 Years to 10 Years Since Completion

[Asia Economy Reporter Kim Min-young] The government's revision of the price ceiling system stems from the recognition that essential expenses incurred during redevelopment projects, such as the recent surge in raw material prices leading to soaring construction costs, have not been properly reflected in the sale prices. As complexes increasingly postpone sales due to expectations of regulatory easing and the burden of rising material costs, the government appears to have promptly initiated system reforms. With this revision, reflecting relocation loan interest and material cost increases in sale prices, the so-called "lottery apartments" priced at only half the market value are expected to disappear. However, from next month, redevelopment apartment sale prices are expected to rise by up to 4%, increasing the housing cost burden on low-income residents.

◆ Reflection of Relocation Costs and Others in Redevelopment Projects = According to the government's announcement on the 21st regarding the rationalization of the sale price system operation, essential expenses such as tenant relocation costs, business loss compensation, eviction lawsuit fees, relocation loan interest, and general meeting operation costs will be reflected in the sale price calculation for redevelopment and reconstruction projects. Unlike public land, redevelopment projects incur additional costs during land acquisition processes such as holding general meetings and relocating or evicting existing residents. Since the current price ceiling system does not adequately reflect these costs, causing side effects, it was decided to reasonably incorporate essential expenses incurred during project execution.

Relocation costs and business loss compensation will reflect the statutory amounts under the Land Compensation Act. Relocation costs cover four months of household expenses for tenants (typically 21 million KRW for a family of four), and two months of household expenses for cash settlement owners per household. Business loss compensation covers four months of business suspension and two years of business closure. Lawyer fees incurred for eviction lawsuits will also be included in the sale price calculation. Relocation loan interest will reflect actual interest incurred but will be operated with a set cap. Association operation costs will be reflected as a fixed amount within 0.3% of the project cost.

◆ Expansion of Construction Cost Reflection Items from 4 to 6... Material Cost Increase Also Reflected = The number of construction cost reflection items applied to sale prices will increase from 4 to 6. Currently, four items?rebar, ready-mixed concrete, PHC piles, and copper pipes?are reflected. Among these, the less frequently used PHC piles and copper pipes will be removed, and window glass, reinforced plywood flooring, and aluminum formwork will be added instead. Additionally, the criteria for reflecting sale price increases will be expanded: besides a single item's price rising by 15%, if the combined price increase rate of the top two materials by weight (ready-mixed concrete and rebar) is 15% or more, or the combined increase rate of lower-ranked materials is 30% or more, the basic construction cost can be adjusted immediately.

The Korea Housing & Urban Guarantee Corporation (HUG) will also reflect material cost increases despite its high price review. Currently, only prices of nearby similar projects are considered, which has been criticized as detached from reality. Therefore, a material cost surcharge system will be introduced to reflect short-term sharp increases in sale prices. HUG's high price review system, which determines apartment sale prices in provincial areas, will also be partially improved. The criteria for selecting comparison complexes when determining nearby market prices will be revised from complexes completed within 20 years to those within 10 years. The improvements will apply to complexes announcing resident recruitment from next month.

◆ Sale Prices to Rise Up to 4%... Effect on Encouraging Sales 'Uncertain' = The Ministry of Land, Infrastructure and Transport expects sale prices to rise by approximately 1.5 to 4% due to this improvement. According to a simulation of redevelopment project sale price impacts provided by the ministry, in the case of the C redevelopment project, the sale price per 3.3㎡ will increase from 24.4 million KRW to 24.59 million KRW, a 2.3% (550,000 KRW) rise. This includes relocation loan interest (100,000 KRW), eviction lawsuit fees (60,000 KRW), general meeting and other expenses (40,000 KRW), and the increase in basic construction costs (90,000 KRW).

This improvement is expected to ease delays in sales schedules in urban areas by reducing the burden on housing suppliers and construction sites. Ham Young-jin, head of the Zigbang Big Data Lab, said, "Redevelopment projects, which serve as the main housing supply source in urban areas like Seoul, are expected to see some relief from delays in sales schedules." In fact, as of the 20th, only 3,173 apartments in Seoul have been sold, accounting for just 11% of the 28,566 units planned for supply within the year, marking a severe supply drought for two consecutive years.

On the other hand, with recent raw material prices rising over 10% and consumer inflation rates reaching the 5% range, the overall inflation trend is strong, and the maximum 4% increase rate is criticized as insufficient to significantly promote project execution or encourage sales. Lee Eun-hyung, a research fellow at the Korea Construction Policy Institute, said, "While the system now allows full flexibility to reflect changes in conditions, it is unlikely to provide a strong immediate driving force for revitalizing redevelopment projects, although differences may exist by project."

Meanwhile, some interpret that the government set the increase rate lower than the 4.5% inflation forecast for next year, mindful of inflation expectations. This is because the rise in sale prices inevitably increases the housing cost burden on low-income residents. As of the 20th, the sale price per 3.3㎡ for Seoul apartments is 33.01 million KRW, a 16.6% increase compared to 28.29 million KRW in 2021.

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