HOME OWNERSHIP has long been considered the pathway to a stable life in Korea, and for most adults, buying a new house is a significant accomplishment. However, rising prices and extensive government policies aimed at addressing the nation’s housing shortage have resulted in a complex and difficult-to-navigate housing application system. Even though house applications can sound like a far-off goal for a recent university graduate, knowing the basics will go a long way towards easing the burden of looking for that first home in the future.

What is housing subscription*?

   Currently, the only way to purchase a brand-new apartment in Korea is to buy a presale home. As the name suggests, presale homes are made available a few years ahead of the construction completion date with the potential home-seeker agreeing to sign a contract far in advance to reserve their right of purchase. Presale agreements in the real estate market have become standard practice, especially in Asian markets where real estate properties are typically one of the most popular investments**. With the expected high returns from capital appreciation over the course of the construction period, investors can easily build up their equity and use presale homes to yield an arbitrage profit. In the meantime, what makes the Korean real estate market distinguished is that presale of newly constructed apartments is mandated and regulated by the government to provide affordable housing for every citizen. This process is referred to as the housing subscription system. First adopted on Aug. 18, 1977, in conjunction with the implementation of the Rules on Housing Supply, it initially applied only to state-owned apartments, but the scope of the policy has since been expanded to include all types of housings in Korea, both private and national. Outside of ownership claims, the primary difference between the two is that national housing is used for residential purposes only, cannot exceed 85m² per household, and is in relatively short supply, whereas the 85m² area restriction does not limit private housing. The housing subscription system is currently the most cost-effective method of purchasing a house in Korea, given the traditionally high prices of existing properties in Seoul and other Metropolitan Areas. This is why the Moon administration actively encourages non-homeowners to use this system to their advantage.

Why the subscription market?

   Since President Moon Jae-in’s inauguration in 2017, the government has introduced 24 different real estate policy plans to address the national housing shortage, a longstanding concern of this administration. According to The Korean Herald, of the roughly 20 million households in Korea, 880,000 households are non-homeowners, compared to 520,000 households who are landlords owning more than one housing unit. Most home-seekers find existing apartments to be outside of their price range with average apartment prices having risen by 55% per 3.3 m2 in just the past three years—the quickest pace recorded over the last three decades***. Apartment prices in population-dense residential areas such as Seocho, Gangnam, Mapo and Seong-dong, to name a few, have flown far out of reach for an average buyer.

   In order to tackle these soaring house prices and reduce shortages in the Greater Seoul metropolitan area, the government has focused its efforts on controlling the capital’s real estate market, particularly by increasing the supply of presale private apartments and making them more affordable. According to the National Statistics Office, the total number of housing units increased from 17.63 million in 2018 to 18.12 million in 2019, and the Ministry of Land, Infrastructure, and Transport has also confirmed that an additional 360,000 units will be available by 2028****. This radical supply schedule does not fully resolve the shortage problem, which in part, owes to the real estate speculators seeking to make arbitrage profits out of rising property prices. Speculators have long been a major constituent of real-estate market in Korea, and as of July 2020, gap investments occupied the problematic 72% of entire apartment purchases in Gangnam. Another policy to address this has been the price ceiling that was imposed on presale private apartments in the four most affluent Gangnam districts and other key areas of the city. This price cap sets the price of presale apartments below what it costs the construction companies to purchase land and cover basic construction costs and transaction costs which, of course, make them an attractive option for many home-seekers. What’s more, as the current policy direction prioritizes non-homeowners who can’t afford to buy expensive existing apartments in the capital, the news of newer apartments getting cheaper has led home-seekers to flock to the subscription market.

Housing subscription total savings account   

   According to the Rules on Housing Supply, the prerequisites to qualify for housing subscription is to open a housing subscription total savings account and pay a monthly deposit ranging from a minimum of ₩20,000 to a maximum of ₩500,000. Owning an account for at least two years and making more than 24 deposits will allow you to apply for both national and private presale housing. Before 2009, there were three types of deposit accounts a person could hold with the specific type depending on the type of housing an individual was applying for as well as the amount of the monthly deposit, but they have since been combined into the said housing subscription total savings account for convenience. The real estate agent and Youtuber, Hu’s Papa clarified in his interview with The Yonsei Annals that anyone already using an older version of the savings account is not required to switch to the newest version.

   Normally, the account offers no interest for the first two years and only up to 1.8% afterward, but it is still better to open an account early to increase your odds of being nominated for a housing subscription. This is because both the deposit amount and the length of holding the account factor into the evaluation of your housing application. Hu’s Papa points out that a youth preferential condition enables a non-homeowner or a member of a non-homeowning family aged between 19 and 34 with an annual income of less than ₩30 million to apply for a higher interest rate of up to 3.3%.

   Some parents choose to open the savings account for their children’s birthday present as there is no age limit for creating a deposit. This is usually without acknowledging the fact that there is no additional merit of holding an account for longer than 15 years. Moreover, no matter how much you save, any monthly deposit over ₩100,000 is counted equally upon reviewing your national housing application, so a useful tip for confused applicants is to save ₩20,000-50,000 before turning 17 and ₩100,000 afterward. Those who can afford more than ₩100,000 can obviously save more, at the risk of closing the account after finding the monthly deposit having become too burdensome. For private housings, however, the total balance in the account also matters, but you are allowed to make a lump sum payment during your application period, if necessary.

   Individuals can create only one account in their lifetime and cannot withdraw from it before they are selected as a resident. However, an individual may choose to close his account earlier, in cases of personal emergency. In that case, there is no other consequence of closing it halfway through, apart from having to start it all over when it comes to counting the term of account ownership. Regardless of when you close the account, you are always able to retrieve your principal payment, in addition to receiving your interest back after two years of account ownership.

Minimum requirement for general and special supply

   Once an applicant has created the housing subscription total savings account, the next step is to check out the eligibility conditions for housing subscription. Clause 25 of the Rules on Housing Supply states that applicants can apply for new apartments through one of two channels: general supply and special supply. Special supply is specifically for first-time buyers, newly married couples, large families, and state-recommended people*****, while general supply covers everyone else. An applicant must satisfy the following conditions to apply for either private or national housing through the general supply scheme: 1) be a person of legal age who is a member of a non-homeowning household 2) currently resides in the city he is applying for 3) has owned and made monthly deposits into savings account for at least two years.

   Meanwhile, with regards to special supply, the conditions differ depending on which category you belong to. In order to be eligible as the first-time buyer which is the largest category, one has to satisfy the following conditions: 1) has paid an income tax for at least five years 2) has saved ₩6 million won in the savings account 3) is married or divorced and living with children 4) earns a monthly income less than ₩7 million. First-time buyers’ requirements have been a source of complaint from potential applicants who argue that the marriage requirement completely excludes single individuals from applying. This is a major point of concern because, as reported by the National Statistics Office, the number of one-person households was 6.04 million in 2019, accounting for 30% of entire households in Korea. Nevertheless, the special supply for first-time buyers is still a once-in-a-life opportunity for every eligible non-homeowner and allows younger applicants to compete on an even footing with people who have held their savings account for longer, as the final applicant is chosen only through a lottery system.

Understanding of the merit-order system

   Merit-order or point-based system is an evaluation method which applies to the majority of private apartments in the Greater Seoul Metropolitan Area which are smaller than 85 m2. Applicants are ranked according to three categories: number of years without owning a house, number of dependent persons in their family, and the length of time spent holding a savings account. The table shows how house application points are calculated under the current system. If a four-member family with two children has not owned a house for 7 years and has saved up for 13 years, that family’s score will add up to (2*7) +(5*2) +(13) = 37 points.

* Korea Appraisal Board offers an online calculator for applicants to compute their own scores.

   The issue with the current merit-order system is that its structure inadvertently penalizes young, unmarried individuals. According to the Korea Appraisal Board, the lower cut-off point in Seoul for the first quarter of 2020 was 47.1 points. As 50 points are generally regarded as the minimum threshold for a successful application, an applicant, on average, has to have earned at least 17 points in each category. However, the greater weight that is put on the first two categories automatically puts younger generations at a distinct disadvantage when looking for housing, especially considering that most presale private apartments in Seoul are provided through this merit-based system. In order to supplement the system, the government increased the special supply for first-time buyers from 20% to 25%, but this still falls short of fully addressing the system’s shortcomings.

Lack of supply in the subscription market

   With the current administration’s price cap policies on new private apartments beginning to truly take effect, the average subscription success rate for private apartments was recorded at 27:1 in the first quarter of 2020, which was double the rate of 2017******. In Seoul, the subscription ratio neared 100:1 with some areas in Gangnam-gu reporting a staggering 340:1 ratio. The difficulties of the increased competition have also been exacerbated by the government falling short of its intended supply of apartment units. According to Real Estate 114, the government pledged to provide 7,679 units by the third week of September. However, with 153 units of the Sinmok-dong Paragon apartments in Yangchun-gu being the only reported supply for this month at the time of writing, there are still no signs of any changes.

   These kinks in the supply schedule are partly due to reforms in the housing subscription system. In January 2020, all the housing subscription-related government duties once managed by the Korea Financial Telecommunications and Clearing Institute (KFTC) have been transferred to the Korea Appraisal Board. As this was a fundamental change to the system, time-lags in the original schedule have been inevitable. Meanwhile, a top researcher at Real Estate 114 contended in her interview with Chosun Ilbo that a more significant reason is the disagreement between construction companies and government agencies on confirming apartment prices. Many construction companies have seen dire losses in their business’s profitability and have accordingly put off their decisions to construct new apartments while those who can’t back out are currently in heated disputes on apartment prices, causing delays in the construction schedule. A recent Yonhap News report revealed that both GS Engineering & Construction Cor. and Daewoo Engineering & Construction Co., Ltd. failed to meet their scheduled construction quotas due to the above reason. The areas subject to reconstruction and redevelopment have also been a bone of contention between residents and the construction companies. As a compromise between the two stakeholders appears to be easier said than done, it is understandable that the current instability in the housing market has deepened the concerns of home seekers. A new phrase, yong-kkul, seems to perfectly capture this anxiety with its meaning that one must collect everything they have, even their soul, to buy a house in times of turmoil.

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   The news that the competition in the subscription market is intensifying has discouraged many applicants. In particular, university students find it nearly impossible to apply for a housing subscription as the merit-order system leaves them at a marked disadvantage, and most do not meet the conditions to apply under special supply. However, Hu’s Papa still advises university students to at least get started by creating a subscription savings account. “You don’t stay as university students forever. Time starts ticking faster, and sooner or later, you will grow older and get married. Start paying attention to what you can do in the present, and by the time you become an adult in your 30s and 40s, you will find yourself in a much better place than others.”

*Housing subscription is translated as 주택청약 in Korean language.

**Real Estate Agent

***Chosun Ilbo

****Yonhap News Agency

*****State-recommended people is translated as 기관추천자 in Korean: The category includes people with disabilities, war veterans, eligible members of the armed forces, and foreigners.

*****The Korea Economic Daily