Real Estate Plan Cost Understated?

Speculation is mounting that the government under-reported the amount of money that will be put into its rental-housing fund for low-income families, which was included in the latest real estate policy package on January 31. Under the new package, the government will build 500,000 mid-size rental units of about 30 pyeong (or 100 square meters), and the rental units can be sold 10 years after rent.

According to the Ministry of Construction and Transportation’s draft and second reports on the latest package, the government will end up paying 16.9 trillion won of interest due to the housing fund by 2019. In the official document, however, the government said the interest will be only 6 trillion won.

The reports were created for inter-ministerial consultation meetings in early January and on February 22, respectively.

The second report says the total amount of the fund will be 106.9 trillion won. The government plans to borrow 90 trillion won from institutional investors, including the National Pension Service, for building rental units. The government will finance the rest of the 16.9 trillion won and pay 6% in annual interest to the institutions by 2019.

In the official document, however, the government said it will contribute only 6 trillion won (or 500 billion won annually), while the institutional investors will contribute 91 trillion won. Six trillion won is 35% of the estimated expenditure in the second report.

One official of the ministry said, “The government cuts its contribution as it can pay interest by increasing rent.”

Another speculation issue is that the government hid the fact that the rental housing project needs a massive amount of government money.

In the draft report on the latest real estate policy package, the government is reportedly spending 9.1 trillion won to build one million rental units by 2012 starting in 2008. But the government predicted it could raise only 30% (2.7 trillion won) of the required money.

In the second report, it said it would draw 1.4 trillion won from the budget to fill the gap during that period and raise the rest of the money through a BTL (Build Transfer Lease) program.

In the official document on January 31, the government said it will give 4.56 million won per pyeong to future rental housing unit owners, a 0.47 million won increase from 4.09 million won. But it didn’t say anything about the total budget spending allocation for the package.

koh@donga.com