[Practical Finance] Pre-sale Price Ceiling Subscription, Affordable but... 'Seongomhudang' Needed

As Low Sale Prices Come with Many Restrictions
Mandatory Residency Period Makes Gap Investment Impossible
Resale Restriction Period of at Least 3 to 10 Years

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Seoyul] Major areas in Seoul and the metropolitan area are subject to the Price Ceiling on Sale system. While the idea of trying for a low-priced sale might be tempting, when applying for units under the Price Ceiling on Sale, it is necessary to adopt an attitude of ‘thinking first, winning later’ rather than ‘winning first, worrying later.’ This is because there are many restrictions as well as low prices.

The Price Ceiling on Sale system requires that the sale price of apartment units be supplied at or below the combined cost of land and construction. This system is applied to areas designated through the Residential Policy Deliberation Committee among public or private land sites, setting sale prices lower than market prices.

For example, in Seoul’s Yeongdeungpo-gu this year, the ‘Centreville Asterium Yeongdeungpo (exclusive area 60㎡)’ subject to the Price Ceiling on Sale has a maximum sale price of 671 million KRW. Meanwhile, a unit of the same size in the nearby ‘Gyeongnam Honorsville,’ built in 1998, was actually sold last month for 1.007 billion KRW.

As a result, it tends to be more popular than other subscription areas. The ‘Centreville Asterium Yeongdeungpo (60㎡)’ saw 7,938 applicants competing for 20 units in the first-priority subscription, resulting in a competition rate of 396.9 to 1. The winning scores were also high, ranging from 69 to 78 out of a maximum of 84 points.

However, if you apply for subscription blindly just because the price is lower than market value, you are likely to face disappointment. It is important to note that for apartments subject to the Price Ceiling on Sale, there is a mandatory residence period upon winning.

For housing supplied on public land, the mandatory residence period is at least 3 years and up to 5 years; for housing supplied on land outside public land, it is at least 2 years and up to 3 years. Therefore, gap investment using jeonse (long-term deposit lease) to pay the balance is not possible, and you must clearly plan your financing, including loans.

When planning financing, keep in mind that since January 3, the individual Debt Service Ratio (DSR) regulation has been enforced, applying a 40% DSR to borrowers with total debt exceeding 200 million KRW. The apartment balance loan is also classified as a mortgage loan and is included in the total loan amount used to calculate the DSR.

Also, ‘Price Ceiling on Sale’ complexes have a resale restriction period, during which the property cannot be sold or gifted for at least 3 years and up to 10 years. Resale refers to selling the purchased real estate again for short-term profit.

If you fail to comply with the mandatory residence period or resale restriction period, or if you are disqualified or your winning is canceled due to failure to secure financing, there is a 10-year restriction period on reapplication, which will negatively affect future subscriptions.

Even within the same area, whether the Price Ceiling on Sale applies can vary. For example, in Seoul’s Nowon-gu, Sanggye-dong, Wolgye-dong, Junggye-dong, and Hagye-dong have been designated as Price Ceiling on Sale areas since December 17, 2019. Therefore, it is most important to carefully check the recruitment announcement of the complex you wish to apply for.