The government has decided not to pursue additional purchases of dwellings, despite the underperformance of the program aimed at acquiring 'post-completion unsold' dwellings in the provinces. Initially, when the problem of unsold dwellings was raised, the government indicated it would proceed with additional acquisitions if necessary, but has now adopted a more cautious stance. The government plans to determine whether the increase in unsold apartment inventory in the provinces is actually translating into a crisis for construction companies, before deciding on additional purchases and the timing of those purchases.
According to the Ministry of Land, Infrastructure and Transport and the Korea Land & Housing Corporation (LH) on the 24th, the Ministry has fallen short of its target for the quantity of unsold dwellings purchased through LH and is currently considering additional acquisitions.
In February, when the issue of unsold dwellings outside the capital region became serious, the Ministry announced it would directly purchase 3,000 unsold apartments in the provinces through LH. The unsold apartments will be utilized as 'Dundun Jeonse Housing' and will be sold after the rental period ends.
A total of 3,536 unsold apartments (58 cases) have applied for purchase through LH. Of these, only 733 apartments (12 cases) passed the acquisition review committee. This means that only about 20% of the total applications have cleared the review threshold.
In order to meet the original target of acquiring 3,000 unsold units, the government needs to purchase an additional 2,300 units. However, it does not seem likely that there will be immediate additional purchases of unsold dwellings. A Ministry official noted, 'There are currently no plans to purchase additional unsold dwellings in the provinces through LH for the time being,' adding that 'the decision on additional acquisitions has not yet been made.'
The reason the government is not immediately moving to purchase additional unsold dwellings is that it needs time to assess whether post-completion unsold dwellings are increasing rapidly enough to trigger a crisis in the local economy. The locations that have requested the government to purchase apartments account for 20-30% of all unsold dwellings. Those who believed they could sell their apartments at a higher price than LH's acquisition price did not apply for purchase. In this regard, the government seems to have concluded that, apart from some construction companies facing liquidity crises, there are many firms capable of enduring unsold inventory.
A Ministry official said, 'While the number of unsold dwellings in the provinces, especially serious unsold dwellings, is increasing, we need to monitor whether it will actually impact the local economy or whether the increase is manageable in the market.' The official further noted, 'Since there were parts of the industry that were lukewarm about purchasing unsold units, we will decide on additional acquisitions considering the speed at which unsold inventory is accumulating.'
Concerns about 'moral hazard,' where the government directly buys apartments that construction companies have failed to sell, also influenced this decision. LH faced criticism for having left about 10% of the unsold dwellings it purchased during the 2008 global financial crisis vacant, thereby acquiring non-marketable inventory. Accordingly, the selection process for the current acquisitions is closely examining the locations and potential for converting apartments into sales. Most of the apartments that applied for purchase this time but were unsuccessful were in outer regions and lacked price and location competitiveness, such as 'standalone apartments,' meaning they had a low likelihood of being turned into sales.
Another government official explained, 'Many applications have been submitted for less viable inventories, such as standalone apartments near highways,' and added, 'Even if we proceed with additional purchases right away, there is no guarantee that there will be an increase in applications for competitive inventory in terms of price and location, so we are allowing some leeway to avoid moral hazard and waste of taxpayer money.'
The fact that other measures to alleviate unsold dwellings in the provinces are also being prepared is another reason why immediate additional purchases are not underway. The Ministry is working on efforts to address unsold dwellings in the provinces through conditional repurchase programs and corporate restructuring real estate investment companies (CR REITs).
The government plans to decide when to make additional purchases based on the local housing market situation. A Ministry official stated, 'If we present quantitative numbers of unsold dwellings in the provinces and commit to purchasing without exceptions, it could lead to adverse effects where there is a deliberate increase in unsold dwelling numbers.' He added, 'We will comprehensively monitor the local construction market and the rate of increase in unsold housing inventory to make future decisions on additional purchases.' Furthermore, he noted, 'When making additional purchases, we will not be targeting the apartments that are currently applying, but will conduct new solicitations.'
In the construction industry, there are calls for the acquisition prices of additional unsold dwellings to be realistic if such purchases are made. One industry official said, 'While the capacity to endure unsold inventory is not great, the difference between LH's acquisition price and the actual selling price is significant, hence some are considering selling directly at a 20-30% discount rather than accepting LH's prices,' stressing that 'realistic acquisition prices are necessary.'