This blog post calmly examines why Korea’s real estate market consistently operates as a structure that forces individuals into strange choices, through redevelopment, subscription lotteries, special supply, and premiums.
Trade your old home for a new one: Apartment Redevelopment
Redevelopment and reconstruction are always hot topics in South Korea. This is because basic necessities and desired aspirations are intertwined. Basic necessities are directly linked to the quality of the living environment. Few people want to live in outdated facilities and dilapidated surroundings. Especially in aging apartment complexes, even if there’s no immediate risk of collapse, significant daily inconveniences arise: lack of parking space, various water issues due to old pipes, poor insulation performance, and noise between floors. For these reasons, when reconstruction occurs, residents’ overall quality of life inevitably improves.
However, the reason people pay even stronger attention to reconstruction and redevelopment lies more in ‘desired expectations’ than in basic needs. It’s the commonly held expectation that “reconstruction or redevelopment will make you a lot of money.” Examining this more concretely requires understanding various concepts like floor area ratio and land ownership shares, but the core ultimately hinges on how much the supply of ‘general sale’ units can be increased. General sale refers to the number of units available for sale to external buyers, not existing residents who are members of the reconstruction association.
For example, if an apartment complex with 100 units is rebuilt to retain the same 100 units, few complexes would actively pursue reconstruction. However, the situation changes if it can be rebuilt to 150 units. The profit from selling the additional 50 units can reduce the reconstruction costs that existing residents must bear. The amount borne by existing members is called the ‘contribution fee’. In other words, it is no exaggeration to say that the viability of a reconstruction project hinges on the size of the contribution fee and the level of the sale price.
From the government’s perspective, reconstruction and redevelopment are key indicators for gauging the flow of the real estate market. The easier reconstruction and redevelopment projects proceed, the more the real estate market tends to revive or overheat. Conversely, as various regulations make reconstruction and redevelopment more difficult, the market is more likely to stabilize or enter a downturn. These projects are often named after specific large-scale complexes, such as ‘Eunma Apartment Reconstruction’, ‘Gangdong Duncheon Jugong Reconstruction’, or ‘Apgujeong Hyundai Apartment Reconstruction’. This is because these complexes were originally developed to meet large-scale housing supply needs in the past. New towns and housing districts, once developed on a large scale to alleviate housing shortages, age over time. Whenever redevelopment issues arise, they resurface in public discourse, typically in the order they were originally developed.
Check carefully before applying: Special Supply
‘Special Supply’ (特供) is an abbreviation for ‘special allocation,’ a term frequently used in online communities and cafes related to housing lotteries. In the apartment subscription process, the available units are divided into general supply and special supply. Special supply is a system that prioritizes opportunities for people who meet certain conditions from the total available units. Newlyweds, multi-child households without homes, and first-time homebuyers are representative examples of special supply targets.
Special supply has very strict eligibility requirements, but once selected as a target, the chances of winning are significantly higher compared to general supply. Consequently, competition for special supply units is always intense. When demand surges, the government tightens eligibility requirements, considering the program’s purpose and market conditions. This process sometimes results in criteria that become detached from reality.
For instance, consider apartments offering special supply for newlyweds in areas with high sale prices and strict loan regulations, particularly in districts like Gangnam. In such cases, only newlyweds who already possess sufficient assets to largely avoid heavy reliance on loans become eligible to apply. Despite the system’s intended purpose of social consideration, it effectively creates a structure accessible only to those with considerable assets. This gap between the system’s intent and reality remains a central point of contention surrounding the special supply system.
Those Seeking Market Price Gains: Premium
Like premium beef or premium milk, the term ‘premium’ is used to denote products with enhanced value. Naturally, products carrying a premium command higher prices. Economically, a premium refers to a surcharge paid above face value or a contract price. In the apartment market, it signifies the profit margin arising between the initial sale price and the actual transaction price.
Generally, apartment pre-sale prices are often set below the surrounding market price. Examining cases where pre-sales failed reveals that the pre-sale price was set excessively high compared to the surrounding market price in many instances. To mitigate this problem, the government has managed pre-sale prices at a certain level through systems like the pre-sale price cap system.
The lower the pre-sale price and the greater the difference from the surrounding market price, the more certain the relative profit the person who purchased the apartment can expect. This is because it is difficult for the government to directly control apartment prices after sale, once they begin to form according to surrounding market rates. At popular apartment sales sites, it’s common to see real estate agents, often called ‘fly-by-night brokers,’ handing out business cards and saying things like, “This unit has a 100 million won premium.” This implies the market price of that apartment is expected to rise by over 100 million won compared to the sale price. It’s essentially a form of solicitation, enticing those who want to immediately resell their unit after purchase to pocket only the premium.
The act of transferring the pre-sale rights to another person before paying the final balance after the sale is called ‘pre-sale rights resale’. Currently, various regulations have made reselling pre-sale rights much more difficult than in the past. Nevertheless, some brokers still operate on the edge of legality, skirting the line between illegal and questionable practices. Conversely, there are also cases where apartment prices fall below the original sale price after the sale. The resulting loss is called a negative premium, or simply a ‘negative premium’. This phenomenon also clearly demonstrates that the concept of a premium does not always guarantee profit.
