Construction costs for apartments in areas not subject to Korea's price cap system are being set arbitrarily, leading to inflated sale prices, with opaque pricing methods cited as the underlying cause, experts say. For housing units of 84 square meters or smaller, sale prices are broken down only into land costs and construction costs. In price-cap areas, land values are high while construction costs are structurally constrained.
In contrast, areas exempt from the price cap are not required to disclose the components that make up construction costs in price-capped apartments, such as direct and indirect construction expenses, design fees, supervision fees, incidental costs and other expenses. Land costs can be estimated based on surrounding market prices, but how construction costs—which include various expenses—are calculated cannot be determined. Price cap-exempt apartments exploit this loophole, with no mechanism to prevent them from raising sale prices since they are not required to disclose costs by item.
Apartment sale prices in subscription announcements are divided into land costs and construction costs. Price-capped apartments additionally disclose add-on costs tied to land and construction by item. Land costs include expenses for removing obstructions and appraisal fees, while construction costs include installation expenses for welfare facilities exceeding legal requirements and costs for raising basement ceiling heights. In price cap-exempt areas, however, subscription announcements divide costs only into land and construction, making it impossible to know which items in construction costs were priced and at what amount.
According to the Seoul Economic Daily's analysis on Wednesday of subscription announcements for apartments sold in Seoul over the past year through the Korea Real Estate Board's Cheongyak Home system, construction costs accounted for more than half of sale prices in some apartments not subject to the price cap. In non-Gangnam areas exempt from the price cap, various expenses that cannot be explained by construction costs alone were added, making construction costs two to three times more expensive than high-end apartments in the Gangnam area built by the same construction company.
At Complex A in Banpo-dong, Seocho-gu, and Complex B in Yeoksam-dong, Gangnam-gu—both in price-capped areas—construction costs accounted for 17.5% and 19.5% of sale prices respectively for 84-square-meter units, below 20%. At Complex C, which launched in Banpo-dong, Seocho-gu last month, 84-square-meter units were sold for 2.52 billion to 2.76 billion won, with construction costs of 690 million to 760 million won accounting for 27.6% of the sale price.
Complex A is a reconstruction apartment that the builder is carefully constructing to create a landmark in the Banpo area. Significant construction costs were invested, including a 2.55-meter living room ceiling height with coffered ceilings, along with high-end landscaping, exteriors and community facilities. However, because the price cap applies, construction costs for 84-square-meter units were set at 7.75 million won per 3.3 square meters based on contract area.
Complex D, which the same construction company launched in Banghwa-dong, Gangseo-gu this March, has construction costs of 13.7 million won per 3.3 square meters for 84-square-meter units. It is difficult to understand why construction costs for apartments built by the same company around the same time differ by roughly twofold. This means substantial additional costs were added to Complex D's construction costs, which are not subject to the price cap. "The contractor's profit would be included, but the association also set the sale price by adding its own costs to take profit," an official at a major construction company said. "Once the sale price is set and the fixed land cost is subtracted, the remainder appears as construction cost in the subscription announcement. That's why non-Gangnam apartment construction costs appear far more expensive than those in the Gangnam area."
In Seoul, the three Gangnam districts (Gangnam, Seocho and Songpa) and Yongsan-gu, which are subject to the price cap, finalize sale prices through a sale price review committee that verifies land costs, construction costs and add-on costs in relative detail. Other areas lack mechanisms to check this.
Experts said expanding the price cap system or establishing mechanisms to review and verify sale prices by item even in exempt areas is necessary to prevent construction costs from rising indiscriminately. Currently, since price cap-exempt apartments are not required to disclose detailed construction cost items, associations serving as operators in urban redevelopment and reconstruction projects maximize general sale prices to generate profits. This ultimately stimulates a "price-matching" effect that pulls up surrounding market values, making it a key driver of housing price increases, experts noted.
