[Asia Economy Reporter Ryu Tae-min] The Democratic Party of Korea is accelerating efforts to supply the 'Price-Confirmed Sale-Conversion Publicly Supported Private Rental Housing (Nuguna Jip)' for non-homeowners with actual housing needs within this year. This policy allows non-homeowners to pay only 10% of the house price as a deposit, live for 10 years with monthly rent cheaper than the market price, and then purchase the house at a confirmed price upon moving in. It is a system designed to help non-homeowners easily secure their own homes. Although it resembles the existing 10-year public rental housing model in that tenants live long-term and then convert to ownership, it differs in the criteria for calculating the sale price.
Different Timing for Sale Price Calculation
'Nuguna Jip' is a concept announced by the Democratic Party’s Real Estate Special Committee in June. It is a type of sale-conversion rental housing where tenants pay 6-16% of the house price and live as tenants for about 10 years before purchasing. During the 10 years, tenants pay rent at about 80-85% of the market price. After fulfilling the mandatory 10-year residency period, tenants can purchase the house at the sale price calculated at the time of initial move-in, which was 10 years earlier. The Democratic Party plans to supply 10,785 units in six locations: Incheon, Ansan, Hwaseong, Uiwang, Paju, and Siheung.
A distinctive feature of Nuguna Jip is that its sale price calculation criteria differ from those of existing public rental housing. Existing public rental housing determines the sale price at the time of sale conversion. Therefore, if the market price rises significantly compared to the initial move-in time, the sale price can increase substantially beyond initial expectations.
In contrast, Nuguna Jip fixes the sale price in advance before move-in, reducing potential future disputes. The sale price ceiling is set by assuming an average annual housing price increase rate of 1.5% from the project start to the sale conversion. Assuming it takes a total of 15 years from construction to tenant recruitment and sale conversion, this results in about a 22.5% increase. Even if the surrounding market price rises sharply during this period, tenants can purchase at the initially confirmed price, and if the market price falls, they can opt out of sale conversion, thus reducing risk for tenants.
Project Success Depends on Construction Company Participation... Future Risks of ‘Lotto Subscription’ and ‘Unsold Units’
Unlike existing public housing, another difference is that tenants fully benefit from the market price gains. In existing public rental housing, the market price gains from rental to sale conversion go to the project developer. However, in Nuguna Jip, the developer takes only a reasonable development profit of 10%, and the remaining market price gains go to the tenants. For example, for a 1 billion KRW house, tenants initially pay 16% of the sale price, or 160 million KRW, move in, pay monthly rent at about 80% of the market price for 10 years, and then pay the initial sale price of 1 billion KRW at sale conversion to complete ownership. The mandatory rental period is 10 years.
However, from the developer’s perspective, the project may seem less profitable, raising concerns about private construction companies’ participation. Since funds are tied up for over 10 years and the profit margin is limited compared to existing rental housing, the success of this project will depend on how the government encourages private developers’ participation through incentives.
Additionally, Nuguna Jip faces criticism that if surrounding house prices rise sharply, the sale price will be relatively low, leading to ‘lotto subscription’ phenomena. Conversely, if surrounding house prices fall significantly and tenants consecutively refuse sale conversion, it could trigger a large-scale unsold unit crisis, which has also been pointed out as a potential problem.
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