The Butterfly Effect of the Villa Supply 'Drought' [Real Estate AtoZ]

Seoul Building Permits and Construction Starts Halved in Q1 Compared to Last Year
Villa Supply to Decrease Further if Redevelopment Projects Are Activated

The supply of villas (multi-family and row houses) in Seoul and the metropolitan area is decreasing. This is because the government is promoting redevelopment and reconstruction projects, reducing the places where villas can be built. Additionally, the demand for villa construction has declined due to the regulation on the maximum limit of jeonse deposit guarantees (from 150% to 126% of the publicly announced price). As villa supply dries up, concerns are raised that housing instability for the main demand groups, young people and low-income households, may worsen. Real Estate AtoZ looked into the current supply situation of villas in Seoul and the metropolitan area.

View of a villa neighborhood from a building in Yangcheon-gu, Seoul.
Photo by Moon Ho-nam

Villa permits and construction starts in Seoul in Q1 this year have halved compared to the same period last year

Villas mainly refer to multi-family houses and row houses. Buildings with five or more floors among apartment-type housing are called apartments. Villas are buildings with four floors or fewer; if the total floor area of one building exceeds 660㎡, it is classified as a row house, and if it is 660㎡ or less, it is classified as a multi-family house. Unlike apartments, villas are supplied on a small scale and have a short construction period. While apartments take about 1-2 years from permit to groundbreaking and about 3 years from groundbreaking to completion, villas take about 1-2 months from permit to groundbreaking and about 6 months from groundbreaking to completion.

Villa supply is important for the housing stability of young people and low-income households. Villas serve as homes and stepping stones for young people and low-income households who find it difficult to live in expensive apartments. Since young people and low-income households find it hard to buy expensive apartments, they enter relatively affordable villas in the form of monthly rent or jeonse (long-term deposit lease). Therefore, unlike apartments, the rental market for villas is more active than the sales market.

However, recent data shows that villa permits and construction starts in Seoul and the metropolitan area have been very sluggish. According to statistics from the Ministry of Land, Infrastructure and Transport, villa permits in Seoul in Q1 this year were 564 households, about 53% less than the same period last year (1,198 households). In the metropolitan area, 1,665 villa permits were issued in Q1 this year, less than half of the 3,691 permits in the same period last year.

Villa construction starts in Seoul in Q1 this year were 909 households, down 48.4% from 1,762 households in the same period last year. In the metropolitan area, 1,858 villa construction starts began in Q1 this year, about half of the 3,513 households in the same period last year.

A view of the reconstruction construction complex in our city.
[Photo by Yonhap News]

When redevelopment projects proceed in prime locations, villa supply in those areas becomes difficult

In particular, as interest in redevelopment and reconstruction projects grows, villa supply has become more difficult. Seoul City designates redevelopment zones such as Moa Town, station area development, and rapid integrated planning. Once an area is designated as a redevelopment zone, villas and similar buildings cannot be constructed there. According to the "Act on Maintenance and Improvement of Urban Areas and Dwelling Conditions," when constructing buildings or subdividing land in redevelopment zones, permission from the mayor or county governor is required, effectively restricting construction activities. According to "Jeongbi Saeop Jeongbi Mongttang," there are a total of 809 redevelopment projects currently operating in Seoul. Since redevelopment projects are being promoted in high-demand areas such as station zones, the places where villas can be supplied are decreasing.

Not only in Seoul but also in metropolitan areas such as Bundang and Ilsan, expectations for redevelopment projects are high. On the 27th of last month, the "Special Act on Maintenance and Support for Aging Planned Cities" came into effect, drawing attention to integrated reconstruction. This special act supports integrated reconstruction. On the 22nd, criteria and scale for selecting integrated reconstruction pilot districts will be announced. According to the Ministry of Land, Infrastructure and Transport, pilot districts are likely to be designated in places like Bundang and Ilsan with up to 20,000 to 30,000 households. As integrated reconstruction is carried out on a large scale, areas where villas can be supplied are gradually disappearing.

With the government lowering the jeonse deposit guarantee limit for villas from 150% to 126% of the publicly announced price, the incentive for developers to build new villas has disappeared. For example, a villa with a publicly announced price of 100 million KRW could previously have jeonse deposit insurance up to 150 million KRW, but with the reduced limit, it is now only possible up to 126 million KRW. In this situation, landlords end up signing jeonse contracts with the next tenant at a lower price. This effectively causes jeonse prices to fall, which becomes a factor in lowering villa prices.

Due to these factors, as villa supply decreases, when demand concentrates, monthly rent or jeonse prices for villas rise. Those who cannot afford the increased prices have no choice but to leave the villas. This means that young people and low-income households, who find it difficult to rent villas, may have to move to more deprived environments such as goshiwon (small dormitory rooms) or jjokbangchon (tiny room villages).

Park Won-gap, Senior Real Estate Specialist at KB Kookmin Bank, said, "The decrease in villa move-in volumes this year and next year may destabilize the jeonse market. Since villas have a short construction period and can be supplied in the short term, we need to normalize the villa supply market and find ways to reduce the housing cost burden on tenants."