Q. How will prices of new condos be controlled?
Potential buyers view a model of apartments in Ttukseom, eastern Seoul. [JoongAng Ilbo]
These questions aside, it’s certain that we will be seeing declining prices of new condominium units in Korea. Why? Because the government will be setting limits on their prices.
Why is the government controlling new condominium prices in the market economy? It is in response to widespread complaints from the public that new condominium prices are too high. To answer the question, why are the prices so high, it would be good to learn a little about the mechanism behind the high prices.
We all know that even condominium units of the same size built by the same builder can sell for different prices, depending on where they are located. Builders set high prices for units that they plan to build in popular residential sites, while offering low prices for those in less popular or less desirable sites. By doing so, builders can maintain certain profit levels. The pithy marketing slogan says it all: “Location, location, location.”
But once the prices of new condominium units are set high, they tend to never go down; like other goods, their prices continue to rise.
For example, units in a condominium complex let’s call it A built in southern Seoul 10 years ago now sell at 10 million won ($10,750) per square meter. Now, a builder (let’s call it B) plans to build a new condominium complex in a neighboring site, next to complex A. In such a case, there is a high possibility that builder B will offer the new condominium units at a price higher than 10 million won per square meter, regardless of the costs of construction of the condominium complex. That’s because the condominium units are new and will have better facilities, builder B will argue. For instance, B may be expected to offer the units at 12 million won per square meter.
Now, residents in complex A will get upset. They will argue that their condominium community has a better environment and transportation; it’s nonsense that B condominium units sell for higher prices than theirs. Therefore, the residents in condominium complex A will agree among themselves not to offer prices lower than 12 million won per square meter when they sell their homes. In turn, residents in the B condominium complex will raise the offer prices for their homes, saying, “We cannot sell our homes at the same prices as 10-year-old condominium units.”
Let’s assume that another condominium complex, C, is built in a neighboring site in such a situation. What price will the builder offer for the C condominium units? You will know the answer. The high prices of new condominium units pull up the prices of older condominium units in adjacent areas and then the high prices of these older units pull up the prices of other new condominium units in the vicinity. This is a vicious circle. Such a phenomenon has been going on in Korea for sometime.
What will be the easiest way to cut such a vicious circle? The government thought it would be best to control prices. For example, the government could prohibit builder B from offering more than 10 million won per square meter for its new condominium units. This is the price cap system that the government will introduce. Under the system, the government sets ceiling limits on builders’ spending on land, construction costs and other costs, the sum of which, plus a margin, determine the prices of new condominium units. Accordingly, these ceilings also will limit condominium prices.
In fact, the cost of purchasing land to build on accounts for a large part of new condominium prices. In some areas of metropolitan Seoul and Gyeonggi province, land prices represent 70 percent of the price of new condominiums. Predictably, the government’s ceiling on builders’ spending on land purchases was met with controversy.
The government had originally planned to set ceilings on builders’ spending to purchase land on the basis of the government’s estimates of land values. But in many cases, builders have no choice but to buy lands at prices higher than the government’s estimates.
For example, builder A can argue that it had no choice but to buy land for condominium construction for 6 million won per square meter in a popular residential site, whereas the government’s ceiling on the land is 5 million won. “If the government does not believe that the market price of land is so high, we will show evidence,” the builder would say.
Due to such arguments, the government changed tack. The government will allow builders, if they show evidence about actual market prices of lands they purchase, to offer condominium prices reflecting the high land prices. But if builders continue to buy lands at high prices, new condominium prices will naturally be set high. So, the government plans to put certain ceilings, even in those cases.
The government is setting ceilings on construction costs. The government will also order builders not to pay more than a certain price, for example, 3 million won per square meter, for construction, considering the market price of cement and other building materials and the wages of construction workers.
Similarly, the government will also set ceilings on the cost of constructing accessory facilities such as gardens and playgrounds. To account for inflation and consumer prices which tend to rise year after year, such price standards will be different every year.
Due to the price cap system, the prices of new condominium units will be set low. The prices could be lower than the prices of existing older condominium units in adjacent areas. Speculation might arise then people might try to purchase new condominium units at low prices to immediately sell them to third parties at higher prices. Speculators frustrate the purpose of the price cap system.
As a measure against speculation, the government also set a period that purchasers of new condominium units are banned from selling. The system had been in place in the past and is being extended with the introduction of the price cap on new condominium units.
By Kim Jun-hyun JoongAng Ilbo [symoon@joongang.co.kr]
with the Korea JoongAng Daily
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