Building: Actual Property Insurance policies of New Yoon Administration

The author is an analyst of NH Investment & Securities. He can be reached at [email protected]. — Ed.  


Presidential transition committee’s housing policy proposals

The presidential transition committee, which was launched in March following the presidential election, has been actively communicating the housing policies of the new Yoon administration with the market. According to the committee, the upcoming government’s housing policies are to differ from those of the previous Moon administration in the following three aspects: 1) housing supply expansion; 2) easing of real estate tax burden; and 3) deregulation of housing-related loans. In the following paragraphs, we will examine details of the above-mentioned major changes.

1) Housing supply expansion: First new town reconstruction and revision of housing lease acts

The Yoon administration is expected to push ahead with the reconstruction plan for the first new town cities, along with deregulation of three major hurdles to reconstruction projects. We note that the transition committee’s Apr 25 announcement that the reconstruction plans for the first-generation new towns would be placed under review as a mid/long-term policy agenda for the Yoon administration sparked great public outcry over delays, and since that time, the committee has hastily changed its previous stance, reaffirming that the Yoon administration will push forward with the reconstruction initiative for old new towns by focusing on: 1) swift passage of the special act for new town reconstruction projects through the National Assembly; and 2) establishment of the government’s own master plan. The related special act has already been submitted to the National Assembly, and its main goal is to remove the floor area ratio regulation. In detail, once the act is passed, the floor area ratio for 30yr-or-older apartments in affected new towns will be raised to 300% at minimum, with the ratio hiked to 500% at maximum for those located nearby public transportation hot spots. Today’s floor area ratios for first-generation new towns stand at 184% for Bundang, 169% for Ilsan, 204% for Pyeongchon, 205% for Sanbon, and 226% for Jungdong. Meanwhile, Yoon’s proposed reconstruction market deregulation (eg, easing of the pre-sale price cap, a reduction of the structural safety weighting in old apartment evaluation criteria, and also the relaxing of the excess profit restitution system for reconstruction projects) is set to be carried out simultaneously.

Recently, Won Hee-ryong, the appointee as the First Minister of Land, Infrastructure, and Transportation of the Yoon administration, said that given the serious market confusion and disruptions caused by the three ‘tenant-protection’ laws introduced in Jul 2020, drastic improvements (either cancellation or minimization) were in need. The above-mentioned tenant protection acts are to: 1) give tenants the right to extend a lease by up to two years when an initial two-year lease contract expires; 2) limit any increase in rent by a landlord to less than 5% when renewing a monthly lease or ‘jeonse’ (lump-sum deposit) lease; and 3) require landlords to report rents to the authorities within 30 days of a lease being signed. While designed to protect tenants from soaring lease prices, these laws have caused serious side effects in the domestic housing lease market in the forms of: 1) soaring jeonse lease prices; 2) greater scarcity of jeonse leases; and 3) the conversion of jeonse leases to monthly lease contracts. In particular, given that jeonse contracts which were renewed two years ago will no longer be protected by the 5% lease price hike limit from Jul 2022, significant confusion looks inevitable in the domestic housing lease market. In the short term, the new Yoon government is to implement stop-gap measures, including the offering of tax incentives to landlords who voluntarily extend lease contract periods, accept below-market jeonse prices, or convert monthly contracts to jeonse contracts. In addition, a plan to revive a registered housing lease business system for apartments, which was canceled in Jul 2020, is under review, though limited to only small-sized (60m2 or smaller) apartments. Once the system is revived, registered house rental business operators should receive tax benefits (eg, exemption from the comprehensive real estate tax scheme or capital gains tax upon transfer) for their rental properties in return for a limit in lease price increase under a certain level.

2) Real estate: To lift heavy capital gains taxes on owners of multiple homes and push down appraised property values

Through an amendment to the enforcement ordinance alone, real estate tax regulations can be revamped, including temporarily lifting heavy capital gains taxes on owners of multiple homes and pushing down appraised property values, the base for taxation. Under the current income tax law, capital gains taxes of 6~45% are levied on single-home owners, with 20%p and 30%p surcharges applied to two-home and three-home owners, respectively. Under the Yoon administration, however, multi-home owners are to be exempt from the surcharges for a year, starting from May 10. Under this exemption, which can be made possible by the administration unilaterally without approval from the National Assembly, owners of two or more homes will pay up to 45% of capital gains when selling a property. Multi-home owners will also be entitled to the special deduction rule for long-term property holding, under which a deduction of up to 30% of capital gains is possible when disposing of a property owned for three or more years.

On his campaign trails, the new president pledged to push down appraised property values to the 2020 levels and adjust fair market value ratios. Soon after he takes office, he is forecast to act on his pledges via an amendment to the enforcement ordinance. But, it is expected to take time to deliver on his other pledge of integrating the comprehensive real estate holding tax and property tax, as this requires an amendment to the law.

3) Real estate: To ease LTV and DSR regulations

Easing of the loan to value (LTV) and debt service ratio (DSR) regulations is under discussion as a way to deregulate real estate lending. The LTV ratio ceiling is likely to be raised to 80% for first time buyers (vs currently 60~70%). After monitoring if the DSR regulation takes hold, the new administration is set to implement its plans of: 1) applying a uniform LTV ratio ceiling of 70% for those other than first time buyers across the nation; and 2) applying a LTV ratio ceiling of 30% or 40% for multi-home owners, depending on the number of homes owned. Also, in calculating DSRs for young borrowers, their future income will be reflected more accurately. DSR is calculated based on the sum of a borrower’s gross debt (which includes the principal and interest payments on mortgages, credit loans, securities-backed loans, etc) divided by their annual income. Under the DSR regulation, the lower a borrower’s income is, the more difficult it is for them to take out a loan. As younger generations tend to earn less than older generations, less credit can be extended to them. Currently, those with W200mn or more in debt are subject to a DSR of up to 40%, but the same percentage is to be applied for those indebted with W100mn or more from July. Accordingly, even if the LTV regulation is loosened, there should be little change in the amount of money an individual can borrow unless the DSR regulation is relaxed as well. Changes in both the LTV and DSR regulations are crucial to facilitate purchases by non-speculative buyers.