[Beginner's Guide to Real Estate] 'Alssongdalsong' Regulated Areas... How Are They Different?

Regulated Areas Divided into Adjustment Target Areas, Speculative Overheated Districts, and Speculative Districts

Adjustment Target Areas Enforce 'Increased Tax Burden'
Heavy Taxation on Multi-Homeowners, LTV Limited to 50%

Speculative Overheated Districts Set LTV to '0%' for Homes Over 1.5 Billion Won
100% Point System for Homes Under 85㎡ in Pre-Sale

Speculative Districts Face the Strictest Regulations
But Continuous Regulatory Pressure Criticized as 'Ineffective'

[Asia Economy Reporter Lee Chun-hee] When you become a real estate reporter, you often get unexpected KakaoTalk messages from friends. "How do I apply for a housing subscription?" "What is the first priority?" For the 2030 'Burin-i (Real Estate + Beginner)' who only have subscription savings accounts created by their parents when they were young, I am going to create a guide.

On the 20th, the government suddenly designated Gimpo City in Gyeonggi Province, Busan, Daegu, and other areas as regulated zones. The government took action against areas where house prices surged due to the 'balloon effect' by enjoying the benefits of non-regulated areas. However, there are criticisms that the balloon effect is shifting to other nearby non-regulated areas such as Paju and Cheonan.

Many people must have wondered what kind of regulations cause house prices to adjust when an area is designated as a regulated zone, and why prices rise when the regulation is lifted or avoided. Today, we will look into the regulations applied to areas divided into adjusted target areas, speculative overheating districts, and speculative districts.

What happens when designated as an adjusted target area...? Multi-homeowners face 'increased tax burden', 1-homeowners and non-homeowners must 'move in within 6 months if buying a house with a loan'

An apartment complex in Gimpo, Gyeonggi Province. [Image source=Yonhap News]

Currently, a total of 75 places are designated as adjusted target areas. All 25 autonomous districts in Seoul are designated, and in Gyeonggi Province, places such as Gwacheon, Seongnam, Hanam, Dongtan 2, Gwangmyeong, Guri, Anyang (Dongan and Manan districts), Gwanggyo district, Suwon (Paldal, Yeongtong, Gwonseon, Jangan districts), Yongin (Suji, Giheung, Cheoin districts), Uiwang, Goyang, Namyangju, Hwaseong, Gunpo, Anseong, Bucheon, Ansan, Siheung, Yongin, Osan, Pyeongtaek, Gwangju, Yangju, and Uijeongbu, as well as Incheon’s Jung, Dong, Michuhol, Yeonsu, Namdong, Bupyeong, Gyeyang, Seo districts, Daejeon’s Dong, Jung, Seo, Yuseong, Daedeok districts, Sejong, and Cheongju in Chungbuk, totaling 69 places. Additionally, from the 20th, Gimpo City in Gyeonggi Province, Busan’s Haeundae, Suyeong, Dongnae, Yeonje, Nam districts, and Daegu’s Suseong district were designated, increasing the total to 75 places.

Especially, Daegu’s Suseong district was a unique case, as it was designated as a speculative overheating district in September 2017 but had been excluded from the adjusted target areas. The government stated that since it was excluded from the adjusted target areas, tax regulations such as multi-homeowner capital gains tax surcharges were not applied, leading to an increase in purchases by multi-homeowners and outsiders, causing rapid price rises and intensified overheating. Therefore, Suseong district was also designated as an adjusted target area, making all speculative overheating districts subject to overlapping regulations with adjusted target areas.

So, what changes when an area is designated as an adjusted target area? Generally, the industry perceives adjusted target areas as 'tax regulations' and speculative districts/speculative overheating districts as 'funding regulations.' Of course, adjusted target areas also include funding-related regulations, and speculative districts include tax regulations, but their main targets differ slightly.

Specifically, when designated as an adjusted target area, the tax burden on multi-homeowners rises sharply. First, capital gains tax is increased for multi-homeowners, and the special deduction for long-term holding is excluded. For capital gains tax, two-homeowners face an additional 20 percentage points, and three-homeowners face an additional 30 percentage points. Comprehensive real estate tax also increases. For those holding two homes within the adjusted target area, an additional tax of 0.6 to 2.8 percentage points is imposed.

Tax benefits for rental housing for those owning one or more homes are also reduced upon new acquisition or registration. Temporary two-homeowners must move into the newly purchased house within one year and dispose of the existing house within one year.

Financial regulations are also strengthened. The loan limit decreases. The Loan-to-Value ratio (LTV) is reduced to a maximum of 50%. For properties priced under 900 million KRW, the LTV is 50%, and for those over 900 million KRW, it is reduced to 30%. The Debt-to-Income ratio (DTI) is limited to 50%. Households owning two or more homes are prohibited from obtaining mortgage loans for new home purchases.

Also, if the purpose is not for actual residence, mortgage loans are prohibited. Therefore, in all regulated areas including adjusted target areas, when purchasing a house with a mortgage loan, the buyer must move into the new house within six months. One-homeowners must also dispose of their existing home within the same period.

Additionally, according to the newly enforced 'Real Estate Transaction Reporting Act' enforcement decree from the 27th of last month, in regulated areas including adjusted target areas, a funding plan must be submitted regardless of the amount when purchasing a house. Previously, in non-regulated areas, this applied only to houses with transaction values of 600 million KRW or more, but when designated as a regulated area, the scope expands to all houses.

There are also various restrictions on housing subscription applications. In non-regulated areas, for houses 85㎡ or less (the so-called 'national housing size'), 40% of winners are selected by a point system and 60% by lottery, while for houses over 85㎡, 100% are selected by lottery. However, when designated as an adjusted target area, 75% of houses 85㎡ or less and 30% of houses over 85㎡ are selected by the point system.

Resale of pre-sale rights is also restricted. For adjusted target area level 1, resale is restricted until ownership registration; for level 2, 1 year and 6 months; for level 3, 6 months. However, this regional classification was revised through the February 20 measures, where the government newly designated Yeongtong, Gwonseon, Jangan districts of Suwon City, Uiwang City, and Manan district of Anyang City as adjusted target areas and classified them as level 1, while upgrading existing level 2 (private land in Seongnam) and level 3 (Paldal district of Suwon City, etc.) to level 1. Currently, all are subject to the same level 1 regulations.

Speculative Overheating District...? No loans for houses over 1.5 billion KRW, all purchase funds must be evidenced

Currently, a total of 48 places are designated as speculative overheating districts. These include all 25 autonomous districts in Seoul, Gwacheon, Gwangmyeong, Hanam, Seongnam, Suwon, Anyang, Guri, Gunpo, Uiwang, Bundang and Sujeong districts of Seongnam, Danwon district of Ansan, Suji and Giheung districts of Yongin, Dongtan 2 of Hwaseong, Yeonsu, Namdong, Seo districts of Incheon, Dong, Jung, Seo, Yuseong districts of Daejeon, Suseong district of Daegu, and Sejong.

When designated as a speculative overheating district, LTV and DTI are each reduced by 10 percentage points. For LTV, for properties priced under 900 million KRW, the limit is 40%, and for properties priced between 900 million KRW and 1.5 billion KRW, only 20% of the house price can be loaned. For 'ultra-high-priced houses' exceeding 1.5 billion KRW, LTV is not allowed at all. Regarding gap investment, if a loan is taken and an apartment over 300 million KRW is purchased within the speculative overheating district, the jeonse (key money deposit) loan is immediately recalled.

In adjusted target areas, only a funding plan needed to be submitted when purchasing a house, but in speculative overheating districts, evidence related to funding must be submitted for all house purchases regardless of transaction amount. This is also a newly implemented system from the 27th of last month. Previously, even in speculative overheating districts, evidence submission was mandatory only for houses priced over 900 million KRW.

Regulations related to redevelopment projects are significantly strengthened in speculative overheating districts. For reconstruction, transfer of membership rights is restricted from the time of approval of the establishment of the association. Except for special cases such as owners who have owned for more than 10 years, lived for more than 5 years as one-homeowners, or overseas migration, transfer of membership rights is not allowed. Furthermore, the government is currently pushing for a legal amendment that disallows recognition of pre-sale rights for reconstruction complexes where the association has not yet been established if the owner has not resided for more than 2 years regardless of ownership duration.

Regarding housing subscription, the 100% point system is applied to houses 85㎡ or less, which has recently been criticized for producing 'Cheongpo-jok' (those who give up subscription). For houses over 85㎡, the lottery quota is reduced to 50%.

'The ultimate' speculative district? Practically 'ineffective'

Lastly, there are speculative districts. Currently, 16 places are designated, including Gangnam, Seocho, Songpa, Gangdong, Yongsan, Seongdong, Nowon, Mapo, Yangcheon, Yeongdeungpo, Gangseo, Jongno, Jung, Dongdaemun, Dongjak districts in Seoul, and Sejong.

A somewhat unique point is that while adjusted target areas and speculative overheating districts are decided by the Ministry of Land, Infrastructure and Transport’s Residential Policy Deliberation Committee, speculative districts are decided by the Ministry of Strategy and Finance’s Real Estate Price Stabilization Committee.

Speculative districts were originally the strongest among the three regulations, but as the regulation levels of adjusted target areas and speculative overheating districts have continuously increased, there are criticisms that the effectiveness of speculative district regulations is negligible.

Currently, for capital gains tax surcharges, regulations in adjusted target areas are even stronger than in speculative districts, and for loan regulations, the same level of LTV as speculative overheating districts is applied. In fact, since the designation of four districts (Jongno, Jung, Dongdaemun, Dongjak) in August 2018, no additional designations have been made. Considering this, there are calls to unify speculative overheating districts and speculative districts for more efficient regulation.