Despite the Passage of Jaechohwan and 1st New Town Special Act... Obligation to Reside Remains, Winners Feel 'Makmak'

Although the bill to ease the reconstruction excess profit recovery system and the special law for the first-generation new towns passed the National Assembly Land, Infrastructure and Transport Committee's bill subcommittee, the amendment to the Housing Act that includes the abolition of the residency obligation failed to clear the hurdle due to disagreements between the ruling and opposition parties, making its passage within the National Assembly's term uncertain. If the abolition of the residency obligation fails, funding plans will need to be redrawn, and since winners must reside for at least two years after moving in, their concerns are deepening. From early next year, a series of complexes subject to the amendment will emerge, and if it ultimately fails, market confusion is expected to be significant.

[Image source=Yonhap News]

According to the Ministry of Land, Infrastructure and Transport and the National Assembly on the 1st, the Land, Infrastructure and Transport Committee's Land Bill Subcommittee passed the amendment to the "Act on the Recovery of Excess Reconstruction Profits" (재초환법, Jaechohwan Act) and the amendment to the "Special Act on the Maintenance and Support of Aging Planned Cities" (1st Generation New Town Special Act) by bipartisan agreement on the 29th of last month, but deferred the amendment to the Housing Act that includes the abolition of the residency obligation. The residency obligation regulation was introduced in February 2021 to block speculative demand amid an overheated real estate market. Buyers of houses subject to the price ceiling system must reside for 2 to 5 years immediately after moving in. According to the Ministry of Land, since February 2021, 66 apartment complexes nationwide with 43,786 households have applied for resident recruitment approval and are subject to the residency obligation regulation.

The opposition party opposes the abolition of the residency obligation, arguing that it could encourage gap investment. Instead, they propose leaving the Housing Act as is and allowing conditional exceptions through enforcement ordinances. On the other hand, the ruling party proposed maintaining the residency obligation but allowing the obligation period to be fulfilled only until before the transfer, not necessarily at the initial move-in. However, both sides oppose each other's proposals, and the disagreement remains unresolved. The problem is that there is only one remaining subcommittee schedule this year, on the 6th. If the bill to abolish the residency obligation is not processed, it is likely to be automatically discarded when the National Assembly session ends in May next year.

Immediately, there is an emergency for the funding plans of successful applicants. Typically, winners with limited financial resources rent out their new apartments as jeonse (long-term deposit lease) and use the deposit to pay the remaining balance. However, if they must reside, they need to revise their funding plans, including bank loans. Violating the residency obligation can result in imprisonment for up to one year or a fine of up to 10 million won. If moving in is difficult, they must resell the apartment to the Korea Land and Housing Corporation (LH) at the sale price level.

The pre-sale rights market is also expected to shrink. Although the government eased restrictions on apartment pre-sale rights transfers in April, actual transfers are practically impossible without fulfilling the residency obligation period. In fact, according to the Seoul Real Estate Information Plaza on the 1st, the number of apartment pre-sale and occupancy rights transfers in Seoul, which was 88 in June, shrank to 18 in October and 11 in November.

The industry expects significant market confusion if the residency obligation system is ultimately scrapped, as apartment move-ins subject to the system are imminent. Seoul's Gangdong-gu 'ePyeonhansesang Gangil Urban Bridge' and 'Gangdong Heritage Xi' are scheduled to move in February and June next year, respectively. The 'Olympic Park Foreon' (12,032 households), known as the largest reconstruction complex since the founding of Korea, is also about a year away from move-in. Kyunghee Yeo, senior researcher at Real Estate 114, said, “If the residency obligation is not abolished, easing transfer restrictions will be useless,” adding, “Since 'ePyeonhansesang Gangil Urban Bridge' and 'Gangdong Heritage Xi' are scheduled to move in early next year, if the bill does not pass, market confusion is expected.”