[6·21 Real Estate Measures] Revision of Pre-sale Price Ceiling System... Pre-sale Prices to Rise Up to 4%

Essential Costs Reflected in Sale Price When Promoting Maintenance Projects
Strengthened Link Between Material Costs and Construction Costs... Rapid Reflection of Market Prices
Market Price Determination Changed from 'Nearby Completed 20 Years' to Within 10 Years
Government Forecasts Sale Price Increase from 1.5% up to 4%

As the system related to the price ceiling on sale prices is reorganized to reflect essential costs incurred in housing maintenance projects in the sale price and to include the increase in material costs in construction costs, the sale price is expected to rise by 1.5% to up to 4%.

On the 21st, the Ministry of Land, Infrastructure and Transport announced that it discussed and finalized the "Rationalization Plan for the Operation of the Sale Price System" containing these details at the 1st Real Estate-Related Ministers' Meeting. The "Price Ceiling on Sale Prices" and the "High Sale Price Review System" have been praised for contributing to the supply of affordable housing, but there have been criticisms that excessive price control lowers business feasibility and suppresses supply. The government plans to resolve market uncertainties and promote housing supply through the rationalization plan for the operation of the sale price system.

◆ Reflecting essential costs in sale prices during maintenance projects = First, as an improvement plan for the price ceiling on sale prices, essential costs incurred during the promotion of maintenance projects will be reflected in the sale price. Currently, in maintenance projects promoted in urban areas, additional costs are incurred in the land acquisition process such as holding general meetings and relocating and evicting existing residents, but these costs are not reflected in the sale price calculation.

Going forward, when calculating the sale price of maintenance project sites, essential expenses such as tenant relocation costs, business loss compensation, eviction litigation costs, financial costs (interest) for relocating existing residents, and costs for holding general meetings will also be appropriately reflected.

Relocation costs and business loss compensation will reflect the statutory amounts under the Land Compensation Act, eviction litigation costs will reflect the actual costs incurred in litigation execution, and interest on relocation loans for procuring relocation costs for association members will reflect contract costs. Essential expenses such as general meetings will also be reflected, but to prevent a sharp rise in sale prices, a cap will be set on the reflection of relocation loan interest. Essential expenses such as general meetings will be reflected as a fixed amount of 0.3% of the total project cost.

◆ Strengthening linkage and rapid reflection of material costs to construction costs = Recently, the increase in material costs due to supply chain disruptions will also be promptly reflected in construction costs.

The current basic construction cost has a non-regular adjustment system in addition to regular announcements (March and September). If the price of a major material (ready-mixed concrete, rebar, PHC piles, copper pipes) changes by more than 15%, it can be readjusted every three months. However, since the system was introduced in July 2008, the adjusted materials have remained the same, and there have been criticisms that materials with low usage frequency need to be changed.

Therefore, to reflect the surge in material costs more timely in sale prices, major material items will be updated and adjustment conditions added. Existing PHC piles and copper pipes will be replaced or supplemented with frequently used items such as window glass and reinforced flooring, which have a large share in the basic construction cost.

In addition to a 15% increase in a single item, if the combined increase rate of the top two materials by share (ready-mixed concrete and rebar) is 15% or more, or the combined increase rate of the bottom three materials (glass, flooring, formwork) is 30% or more, non-regular adjustments will be pursued within three months of the regular announcement. The government expects this to have an effect of increasing sale prices by 0.5%.

The Dunchon Jugong Reconstruction Complex in Gangdong-gu, Seoul, the largest-ever reconstruction project, is facing a construction halt crisis. As conflicts over project costs between the association and the construction companies reach a peak, the Dunchon Jugong Construction Consortium (including Hyundai Engineering & Construction and three other companies) has announced a construction stoppage starting on the 15th. The photo shows a banner announcing the construction halt at the reconstruction site on the 14th. Photo by Kim Hyun-min kimhyun81@

◆ Transparency in the previously 'black-box' sale price review = The sale price review process, which had been criticized for being operated as a black box, will have enhanced transparency.

Until now, when calculating land prices in private land, the appraisal results were verified confidentially by the Korea Real Estate Board, but there were criticisms that there was no procedure for the appraisers or external opinion gathering to participate, so improvement was needed.

Therefore, to enhance the objectivity and fairness of land price verification and to enable early completion of evaluations, a Land Price Verification Committee will be established so that, in addition to the Korea Real Estate Board, the appraisers and experts can directly participate in the verification. The appraisal guidelines and verification standards of the Korea Real Estate Board will also be made more specific.

◆ Changing the nearby market price determination from 'within 20 years of completion' to 'within 10 years' = Separately from the price ceiling on sale prices, the Housing and Urban Guarantee Corporation (HUG) will also promote improvements to the high sale price review system, including flexible reflection of material cost increases, rationalization of review standards, and procedural improvements.

A newly introduced system is the "Material Cost Addition System." If the increase rate of the basic construction cost at the time of sale guarantee is higher than the average increase rate of the basic construction cost over the past three years, the sale price will be partially increased.

Also, the criteria for selecting comparable complexes for determining nearby market prices will be lowered from "within 20 years of completion" to "within 10 years." This measure alone is expected to increase sale prices by 0.5%. Furthermore, detailed evaluation criteria and scoring disclosure by HUG when selecting comparable projects will also be pursued. The revision of HUG's enforcement rules for the high sale price review system is scheduled to be completed within June.

The Dunchon Jugong Reconstruction Complex in Gangdong-gu, Seoul, the largest reconstruction project in history, is facing a construction halt crisis. As conflicts over project costs between the association and the construction companies reach a peak, the Dunchon Jugong Construction Project Team (including Hyundai Engineering & Construction and three other companies) has announced a construction stoppage starting on the 15th. The photo shows the reconstruction site on the 14th. Photo by Hyunmin Kim kimhyun81@

The recent system improvements will apply to all projects that have not announced resident recruitment before the enforcement of the revised rules. The government plans to implement the rationalization plan for the operation of the sale price system as soon as possible to resolve market uncertainties and promote housing supply.

This system improvement mainly applies to maintenance projects, and public land projects supplied affordably in new towns are expected to have little impact on sale prices as they are not significantly related to this measure.

Won Hee-ryong, Minister of Land, Infrastructure and Transport, said, "Through this system improvement, essential costs involved in housing supply will be more appropriately reflected in sale prices, and procedures related to sales will be conducted more promptly and transparently." He added, "In the future, during the promotion of the 2.5 million+ housing supply plan and others, we will discover improvement tasks for promoting housing supply and improving quality, and resolve difficulties in the field."