If officetel regulations are lifted, will ‘youth housing’ improve?

Industry calls for exclusion of officetel housing
“Sudden market contraction due to increased tax burden”
Claims that the housing crisis is worsening due to a decrease in the number of small houses

Excess as an ‘investment destination’ during rising housing prices
Expert: “The bubble is bursting now.”
Speculative demand surges during the transition to ‘non-housing’
Problems such as sudden increase in jeonse prices and reverse jeonse
Rather, there are concerns about housing instability for tenants.

“We need to think carefully, but I basically think we need to break away from the apartment-centered thinking that we have had for a long time.”

Park Sang-woo, candidate for Minister of Land, Infrastructure and Transport, responded as follows to a question from reporters asking about his position on easing regulations on via-apartments on the 5th, his first day of work. As a ‘housing supply shortage’ is expected within 2-3 years, the purpose is to implement supply measures focusing on non-apartment buildings that can be constructed relatively quickly. Via apartments include townhouses and villas, but the ones the market is mainly focusing on are officetels.

In response to the ministerial candidate’s remarks, the construction industry is calling for ‘deregulation’ every day. It is said that discriminatory regulations that exclude multiple homes from the tax exemption benefits that small homes receive while subjecting them to the same heavy taxation as apartments have led to a contraction of the officetel market and to housing instability among young people.

Why the industry insists on ‘easing regulations on non-apartment’

The Korea Housing Construction Association and the Korea Real Estate Development Association, comprised of small and medium-sized construction companies, announced on the 7th that they had delivered eight recommendations for easing regulations on non-apartments to the Ministry of Land, Infrastructure and Transport under the title ‘Small Households and Housing Stability for the Common People’.

Among these, the most urgent policy was the exclusion of small urban living houses and officetel housing from the calculation. As small urban living houses and officetels are often purchased by middle-aged and elderly people with cash reserves for stable rental income, the logic is that officetels other than their own homes should be excluded from the number of houses to maintain ‘one-home status’.

The industry argued that as officetels were recognized as housing, the tax burden, including heavy taxes on multiple homes, increased, leading to a sharp decline in the officetel market.

According to the Housing Industry Research Institute, with the revision of the local tax law in August 2020, officetels subject to housing property tax were changed to be included in the number of houses, leading to a sharp decline in purchase demand for rental purposes. The supply of officetels, which was 109,000 rooms in 2019, was cut in half to 52,000 rooms in 2022, and then decreased to 13,000 units as of September this year.

Joosan Research Institute said, “If the decline in the supply of small houses of 60㎡ or less, where 70.3% of single-person households live, continues, the housing crisis for young people and the working class may worsen. He argued, “The entangled tax system and building standards must be reorganized as soon as possible.”

“The problem is not lack of supply, but the harmful effects of oversupply.”

However, there is a counter-argument that the recent contraction of the non-apartment market is largely due to the real estate recession rather than the unreasonable tax system. Until just before 2020, when housing prices began to rise, newly built villas such as officetels, small urban living houses, and multi-family homes were oversupplied as ‘alternative investment destinations’ that could avoid apartment regulations.

The supply of officetels, which was 72,900 units in 2017, increased by 49.6% in two years to 109,100 units in 2019. The quantity of officetels released in this way was sold like hot cakes until 2021, when house prices reached their peak, through word of mouth that ‘small capital gap investment’ was possible. The ‘trick’ that tenants can avoid various tax regulations, such as comprehensive real estate tax and capital gains tax, was widespread because if they did not report moving in, it would be registered as an ‘office building’.

However, as the real estate market froze sharply due to the interest rate hike in the United States, the construction industry lost steam. Real estate construction is structured in such a way that a bridge loan is first obtained using land as collateral, construction permission is obtained, and then the loan is transferred to main PF (project financing). However, the real estate market has cooled rapidly, and the number of unsold properties has increased rapidly due to ‘jeonsepobia’ due to lease fraud and tin lease.

Officetel buyers were also in trouble. As the real estate market froze in a situation where tenants were brought in at high jeonse prices, a ‘reverse jeonse crisis’ occurred in which jeonse prices plummeted compared to two years ago. If you are registered as a rental business, you often own dozens of houses because it is not related to the regulation on the number of houses. However, as the conditions for signing up for lease guarantee insurance have been strengthened, downward pressure on lease prices has increased.

Choi Eun-young, director of the Korea Urban Research Institute, said, “The problem now is not the lack of supply of via-apartments, but the harmful effects caused by oversupply.” He added, “We must first consider whether the supply of via-apartments is really necessary in an era of population decline.”

Some point out that there is a need to clarify the legal status of non-apartments such as officetels. Seo Jin-hyung, co-representative of the Fair Housing Forum (Professor of MD Product Business Department, Kyungin Women’s University) said, “Under the Building Act, officetels should be clearly divided into ‘residential use’ and ‘business use’ to reduce consumer confusion from the time of acquisition.”

However, in this case, since ‘residential officetel’ is highly likely to be recognized as a house, it will be subject to the same strengthened regulations in firefighting, parking, and public facility contribution as general multi-family housing such as apartments. Since these costs are passed on to the sale price, the return on investment of officetels is bound to decrease.

Housing instability for single-person households brought about by deregulation

Contrary to industry claims, not recognizing officetels or small urban living houses as housing may actually worsen housing instability for tenants living there.

If non-apartments such as officetels are excluded from calculating the number of houses, there is a high possibility that speculative demand will increase because free sales will be possible without increased transfer tax. This leads to the influx of landlords without financial capabilities into the market. During periods of rising housing prices, rental prices may skyrocket, and during periods of falling housing prices, reverse rent troubles and large-scale non-return of deposits may occur, and in this case, the tenant’s housing stability may be greatly damaged.

Lim Jae-man, a professor of real estate at Sejong University, said, “The basic principle is to recognize all houses where people live as houses,” adding, “As most officetels are purchased for rental income, they are required to register as a rental business, and thereafter, a rental business focusing on monthly rent is established.” “We need to encourage them to do it,” he said.