Despite a slump in the construction market, public housing construction costs are rising sharply due to inflation in raw material prices, labor costs and more. Public housing touted a "good sale price" in the 300 million to 400 million won range at the time of advance subscriptions, but as construction costs increase, total project costs have climbed by more than 60% in some cases, and sales prices are expected to rise alongside them.
On Jan. 15, according to the Ministry of Land, Infrastructure and Transport (MOLIT) and the Korea Land & Housing Corporation (LH), the Ministry of Land, Infrastructure and Transport (MOLIT) approved a change to the public housing construction project plan that raises the project cost for the Incheon Gyeyang A9 block to 281.3 billion won from the previous 173.4 billion won. That is an increase of 107.9 billion won (62.2%) from the original plan.
The Incheon Gyeyang A9 block is a third new town project in Gyeyang District, Incheon, supplying nine apartment buildings, two basement levels to 15 above-ground floors, and 475 households on a total floor area of 66,867.25 square meters. It will be supplied as a Newlywed Hope Town. The project period runs through Dec. 2028.
Not only this site but also most public housing projects saw expense increases last year. At the Namyangju Jinjeop 2 District A3 block in Gyeonggi, slated as a Newlywed Hope Town, the project cost rose to 175 billion won from the previous 104.4 billion won, up 70.6 billion won (67.7%). The Hwaseong Dongtan 2 A78 block also saw the project cost increase to 581.9 billion won from 456.2 billion won, up 125.7 billion won (27.5%).
Project costs have risen like this because construction costs, including labor and materials, climbed significantly in the five years since the plan was released. Expenses tied to stricter safety regulations also increased. In the second half of last year, the LH housing construction cost index for for-sale housing was tallied at 122.05. That was up 0.53% from the previous half and 22.05% from the second half of 2020. The rental housing construction cost index was 122.83, up 0.59% from the previous half and 22.83% from the second half of 2020.
The LH housing construction cost index measures the period-over-period rate of change in construction costs invested in multifamily housing construction. It uses the second half of 2020 as the base (100).
The problem is that rising project costs can be passed on to sale prices. At the Uijeongbu Ujeong A-1 block last year, project costs rose 43.6% to 271.2 billion won from 188.8 billion won due to higher construction costs and project delays, and sale prices increased. At the time of advance subscriptions, the estimated sale price for an exclusive 59 square meters was 333.61 million won, but at the main subscription, it rose by about 57 million won to 390.75 million won.
At the Goyang Changneung A4, S5 and S6 blocks as well, main subscription sale prices rose by up to about 100 million won compared with the estimated prices at the time of advance subscriptions. As sale prices climbed from the advance subscription stage, many advance subscription winners gave up their main subscriptions.
At the Incheon Gyeyang A9 block as well, sale prices are expected to rise alongside the increase in project costs. When advance subscriptions were conducted in 2021, the estimated sale price for an exclusive 55 square meters was set at 339.13 million won. However, with project costs rising sharply, a price increase is expected to be unavoidable at the main subscription scheduled for March this year.
However, with the greater Seoul real estate market on an upswing, the Incheon Gyeyang A9 block is also expected to be priced below market value, so the rate of advance subscription cancellations is not expected to be as high as last year.
LH says it intends to prevent the burden of higher project costs from being passed on to the public. An LH official said, "Incheon Gyeyang A9 block is a site that applied for project approval in 2021, and since then construction costs as well as compensation unit prices have risen significantly, so the project cost also increased," adding, "However, this block is subject to the price cap on sales, and sale prices are set considering surrounding market prices and appraised values, so it is hard to say that the entire increase in project costs will be passed on to sale prices."