[Op-Ed] Easing Reconstruction and Redevelopment Rules Will Revive the Housing Market

Since the general election, the importance of addressing regulations on reconstruction and redevelopment has grown. At a time when the real estate market is sluggish and construction costs have surged, it is difficult to revitalize the housing market if reconstruction projects are also heavily regulated. To breathe life into reconstruction projects, four institutional reforms should be considered.

Additional member contributions must be reduced.

Additional member contributions are the extra amounts that association members must pay when construction costs increase. Rising raw material prices and labor costs often require members to make additional payments. In Sanggye Jugong in Nowon-gu, the member contribution is around KRW 500 million. Reconstruction there has been halted because the contribution is so high that it is comparable to the price of a home itself. Even if reconstruction procedures are simplified, it will be difficult to increase reconstruction supply unless conflicts over cost-sharing between builders and association members are resolved. This is because high contribution levels reduce the benefits to members. Projects can move forward only if additional contributions are lowered to reduce the burden on members.

Floor area ratios must be raised for denser development.

Restrictive floor area ratios do nothing but hinder the efficient use of space. More residential space must be created by increasing floor area ratios. For example, Eunma Apartment in Gangnam has a floor area ratio of 204%, which undermines project profitability. It is inefficient not to build taller structures on such valuable land in Gangnam. Raising floor area ratios can increase housing supply in limited urban areas and highly desirable neighborhoods. In addition, with housing demand rising as the number of households grows—especially demand for apartments—and as the number of demolished homes increases, improving floor area ratios is like welcome rain in a drought.

The burden of public contribution, often called “the key to success or failure in reconstruction,” must be lowered.

In reconstruction projects, developers receive various incentives and, in return, transfer part of the land to the government. However, conflicts often arise over donated facilities such as elderly care facilities and public pedestrian passages that residents do not want. Beyond conflicts with residents, public contribution also reduces developers’ profits and raises apartment sale prices. The burden of public contribution should be lowered to improve the profitability of reconstruction.

The excess profit recapture system must be abolished.

Up to 50% of the gains earned by association members through reconstruction are recaptured. This is effectively a tax on apartments that have not yet been sold—that is, on unrealized income. It also creates a double taxation problem when combined with property taxes and capital gains taxes imposed after sale. Regulations intended to curb speculation end up increasing the burden on association members and reducing housing supply. When association members are already facing large additional contributions, adding an excess profit charge further undermines profitability and makes it all but impossible to move reconstruction projects forward. The excess profit recapture system must be addressed in order to improve the viability of reconstruction projects.

To make successful reconstruction plans in areas with strong locations or project viability, deregulation is needed to improve profitability and efficiency. The current situation—where developers must bear the costs when projects are unprofitable, but must also pay charges when rising home prices generate profits—must be resolved. To improve viability, floor area ratios must be increased so that the benefits of reconstruction can be realized. Now is the time to energize the real estate market by lowering public contributions and additional member contributions and abolishing the excess profit recapture system.

Jungwon Lee

Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 재건축·재개발, 규제완화해야 부동산 시장 활력 생긴다

Author: Jeong-won Lee

Date: 2024-12-06

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=27149