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Price Cap on Privately Built New Apartments

#Key Business Issue l 2019-07-15

Business Watch


The government is set to introduce the so-called presale price cap for new apartments to be built on privately-owned housing sites. In a parliamentary session on July 10, Land, Infrastructure and Transport Minister Kim Hyun-mee said that the government is closely examining when and how to implement the system. Here is Choi Eun-young, director of the Korean Center for City and Environment Research, to discuss yet another government measure aimed at curbing soaring real estate prices.

In August of 2017, the government announced measures to ease the conditions for putting a ceiling on presale prices of new apartments to be built on private land. In November the same year, the government finished arranging a revised decree of the relevant act. In other words, it is fully prepared to implement the measure. 

In 2014, the Park Geun-hye government strengthened conditions for the presale price cap system. Due to those strict regulations, the price limit has never really been applied to any new private apartments since then. Under the current rule, the government can impose a ceiling on preconstruction sale prices of new apartments if the average prices of existing apartments in surrounding areas more than doubled the consumer price index over the previous 12 months. The government is considering easing this condition to make many more new apartments subject to price controls. 

In Korea, new apartments are sold typically before construction is complete.  Presale prices are set based on the value of the land, basic construction costs plus appropriate profits for builders. At present, the presale price ceiling system is actually applied to homes to be built on public housing sites only, due to strict requirements for those on privately-owned housing land. 

However, as the government decided to ease the conditions two years ago, it can actually execute the price cap system for new privately built apartments as well, simply by revising a relevant enforcement decree. That means the government has long been ready to implement the system. But why is the government moving to introduce it now?  

I think the skyrocketing home prices in recent years are tied to the virtual abolishment of the presale price ceiling system in December of 2014. Before that, presale prices of houses were capped at 40 million won per 3.3 square meters. Since 2014, however, prices have far exceeded 40 million won, especially in the Gangnam area south of the Han River. Some even speculate that prices in extreme cases reach as high as 100 million won per 3.3 square meters

Aware of a steep rise in presale prices of new apartments, the government is considering reintroducing the price cap system. In May, presale private apartment prices in Seoul rose 12.54 percent from a year earlier. The growth pace is overwhelming, compared to a mere 1.96 percent growth in prices of existing apartments in the capital during the same period. But there are also concerns about potential side effects of the measure. 

The execution of the preconstruction sale price limit will cause the prices of new apartments to fall. The system was first introduced in 2007 under the Roh Moo-hyun government, and home prices remained stable until 2013. But the system is feared to lower the quality of new homes and eventually result in a decrease in housing supply and home price hikes after all. Housing prices have actually risen drastically since 2014 when the system was, in effect, scrapped. Many are concerned that it will generate the so-called balloon effect or the spring effect.  

Lower presale prices of new apartments will hurt construction companies’ profitability. Some builders stopped supplying apartments in May 1988, citing worsening profitability. For the following seven months, not a single private home was offered for presale. Likewise, the introduction of the presale price ceiling system in 2007 led to dwindling home supply. Amidst both expectations and worries about the reintroduction of the system, the government is examining an appropriate time to execute the plan. 

The government seems to be carefully watching the market situation for now. Housing prices remained stable or fell for some time, but have risen slightly as of late. I think it’s too late if the government enacts a policy after a problem already occurs. Good policies are ones that can prevent potential problems before they begin. It is necessary for the government to take action when there are signs of problems ahead. I imagine the government will implement the plan before long

The revision of the enforcement decree calling for easing the conditions for presale price limits does not require legislative proceedings. If it is approved in a Cabinet meeting this month, the revised decree can go into effect from as early as September. Still, the government may allow a grace period or announce additional measures to minimize market shock. Then the system could be put into action in October or November. But exactly what they should regulate will be more important than when to regulate.

Some regulations, including the policy of reviewing presale prices, have revealed their limitations. For instance, builders who choose to sell new apartments after construction are not subject to presale price reviewing, and are free to set prices at will. Also, introducing the new system only in particular areas could generate an undesired balloon effect that raises housing prices in other regions instead. There is reason for concern, given the huge amount of floating money in the market right now and strong speculative demand. So the new measure should be implemented more widely. Learning a lesson from its previous policies, the government needs to close any possible loopholes and formulate a well-thought-out plan

Price controls of new apartments built on private land will have a significant impact on the housing market. In consideration of concerns over some downside risks of the system, the government will have to carefully examine the relevant policy from a long-term perspective before putting it into practice.

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