Increase in Reconstruction Floor Area Ratio... Will the Redevelopment Excess Profit Charge Ratio Also Be Adjusted?

Government Expresses Concern Over Housing Price Increase if Floor Area Ratio Regulations Are Eased... Considering Measures to Prevent It

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] As the government considers easing floor area ratio regulations for reconstruction as a measure to expand housing supply in the metropolitan area, adjusting the rate of the Reconstruction Excess Profit Recovery System is also being discussed as a way to curb rising house prices. However, experts point out that if the profitability for association members drops sharply, it could have the adverse effect of slowing down reconstruction projects.

On the 29th, a government official stated, "If reconstruction regulations are eased, excess profits will increase accordingly," adding, "Especially in areas like Gangnam and other parts of Seoul, there could be a sharp rise in house prices. Policy considerations regarding the rate of excess profit recovery will also be made alongside this."

Kim Tae-nyeon, the floor leader of the Democratic Party of Korea, also announced on the 20th, "We will strengthen regulations on acquiring and holding multiple homes and establish a system to recover excess profits." The Reconstruction Excess Profit Recovery System is a policy where if association members gain an average development profit of more than 30 million KRW through reconstruction, the government collects up to 50% of the excess profit as a levy. The system applies a progressive rate to the excess profit calculated by subtracting housing price increases, construction costs, and association operating expenses from the rise in house prices from the formation of the association promotion committee to the move-in date.

Although introduced in 2006, the system was temporarily suspended from 2013 to the end of 2017 due to concerns that it would dampen the real estate market following the financial crisis, and was reinstated in January 2018.

The ruling party and government are considering easing floor area ratio regulations for reconstruction and redevelopment as one of the housing supply measures to be announced next week for the metropolitan area. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, said at the National Assembly's Planning and Finance Committee yesterday, "Discussions are ongoing within the government regarding floor area ratio and height restrictions as well as efforts to discover new housing sites."

The government and ruling party are concerned that easing floor area ratio regulations to expand housing supply could lead to further increases in house prices. To prevent this, they are also considering expanding the current rate of excess profit recovery for reconstruction.

The government’s stance is that even if the upcoming measures do not immediately include an expansion of the excess profit recovery rate, they can introduce it as an additional measure if house prices rise excessively due to reconstruction in the future.

Experts believe that if the floor area ratio regulation is eased while simultaneously increasing the excess profit recovery rate, the effect on housing supply will be limited. Professor Kwon Dae-jung of Myongji University’s Department of Real Estate said, "Public reconstruction and redevelopment projects can only be carried out in areas where profitability has deteriorated," adding, "If the excess profit recovery system is introduced as an additional measure afterward, the reconstruction projects themselves could slow down."

Yoon Ji-hye, senior researcher at Real Estate 114, said, "With the pre-sale price ceiling system and the reconstruction excess profit recovery system already limiting the share that association members receive, raising the excess profit recovery rate could delay reconstruction projects," adding, "This is a dilemma where expanding real estate supply → easing regulations → increased speculative demand are linked."