Reconstruction rules must change to boost urban housing supply

Imagine starting your day with a hotel-style breakfast overlooking the Han River, practicing golf in the basement in the afternoon, and wrapping up your day with a stroll along pathways designed by international firms. This idyllic lifestyle is marketed to potential residents of new apartment complexes.

However, the reality of recently built apartments is far from this luxurious image. Basements flood during rains, and newly constructed homes suffer from condensation and mold. The soaring costs of raw materials and labor have made it challenging to construct quality apartments, as evidenced by the increasing number of defect disputes from those apartments. This has led to discussions in real estate communities about avoiding apartments built after the onset of supply chain crises in 2020.

Amid these issues, over 2.6 million apartments have surpassed the 30-year reconstruction age limit. This situation stems from the massive supply of apartments in the metropolitan area during the 1980s to stabilize housing prices, leading to unintended consequences. While not all apartments need reconstruction, no land is available for new housing supply in major urban areas with high housing demand except through reconstruction or redevelopment.

But can Korea’s reconstruction associations and construction companies handle this "era of reconstruction"? According to the Korea Housing and Urban Guarantee Corporation (HUG), as of the end of April, the average selling price per square meter of private apartments in Seoul was 11.77 million won, up 2.36% from the previous month and 26.7% from the same month last year. The average selling price per 3.3 square meters is poised to surpass 40 million won. Rising construction costs are inevitable, considering the recent price rise, labor shortages at construction sites, and unresolved real estate project financing (PF) issues. Increased construction costs have become a constant in reconstruction projects.

Despite this, there is still no interest in cost-saving methods at reconstruction bidding sites. Companies are eager to install luxurious imported materials, built-in furniture, appliances, and high-end facilities like "sky bridges" connecting buildings and "infinity pools" on rooftops, akin to those found in luxury hotels. They also landscape complexes to resemble high-end resorts and invite international designers to design community facilities like playgrounds and lounges.

In any business, it is common sense to estimate total costs and manage expenses within that budget. However, this common practice is ignored in reconstruction projects. Construction companies bid low to win projects, then raise construction costs by billions of won, while associations focus only on making their complexes "landmarks" to increase property value and earn margin at sales. The increased costs are then passed on to first home buyers, not the associations or construction companies, by raising the sale prices. This burden is shifted to those jumping into the residence application market out of fear that prices will rise further.

Reconstruction projects will proceed nationwide, including the first-generation new towns. If the fundamental approach to reconstruction does not change, the current construction cost conflicts will continue to repeat themselves in different locations. The public sector must intervene if construction companies and associations do not change voluntarily. It is time for new rules and a new role for regulators.