[Real Estate Regulation Analysis] Effects of Land Transaction Permit Zone Designation in All of Seoul and Strategy to Block Gap Investment"

[Real Estate Analysis] Land Transaction Permit Zone Designation Across All of Seoul

"A house as a space for residence, not speculation," permeates the government's real estate policy direction. The recent measure designating all of Seoul and key areas of Gyeonggi as Land Transaction Permit Zones is a strong declaration of intent to curb market overheating and completely block speculative demand, especially gap investment, not intended for actual residency.

In this post, we analyze the policy background behind the designation of Land Transaction Permit Zones (hereafter LTP Zones) across all of Seoul and closely examine the impact this super-strong regulation will have on the future real estate market, particularly the sales and *jeonse*/monthly rental markets.

Effects of Land Transaction Permit Zone Designation in All of Seoul and Strategy to Block Gap Investment

1. Background and Significance of Land Transaction Permit Zone Designation

The government took this action to preemptively curb market overheating as clear signs of rising house prices and inflow of temporary demand became apparent, centered on Seoul and the surrounding metropolitan area. This particular measure is notably strong because it applies the so-called 'Triple Regulation', designating Land Transaction Permit Zones simultaneously with Adjustment Target Areas and Speculative Overheated Zones.

Key Regulation of LTP Zone Designation (2 Years Mandatory Actual Residency)

The biggest key is that purchasing a house within an LTP Zone triggers a mandatory actual residency of 2 years.

• Gap Investment (Gap Investment) Fundamentally Blocked: With the actual residency requirement, the act of purchasing a home by securing a *jeonse* (lump-sum deposit lease) becomes virtually impossible.
• Strengthened Regulation on Non-Housing Loans: The Loan-to-Value Ratio (LTV) for non-housing mortgage loans within LTP Zones is also reduced from 70% to 40%.
• Inclusion of Housing Other Than Apartments: While previously limited to apartments in some areas, this measure includes apartments as well as *yeonlip* (row houses) and *dasidae* (multi-family) houses where one or more apartment buildings are included within the same complex.

These regulations demonstrate the government's stance to fundamentally block housing purchases for investment purposes and firmly prevent the inflow of speculative capital into the housing market.

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▲ Gap investment (*jeonse*-backed purchase) blocked by the designation of the Land Transaction Permit Zone

2. Analysis of Impact on the Sales Market: Short-Term Transaction Cliff vs. Long-Term Stigma Effect

The designation of the Land Transaction Permit Zone has an immediate and strong impact on the real estate sales market.

Short-Term Effect: Sharp Decrease in Transactions and Halting of Price Increase

The first phenomenon to appear is a sharp decrease in transaction volume. Both sellers and buyers adopt a wait-and-see attitude immediately after the regulation, and the demand for buyers who cannot meet the actual residency requirement withdraws from the market. Consequently, in the short term, the price increase is halted, or a weak trend with price stabilization may appear as speculative demand exits.

Mid-to-Long-Term Effect: Balloon Effect and Stigma Effect

However, the effect of the LTP Zone needs to be approached cautiously from a long-term perspective. Once designated, an LTP Zone can be subject to institutional path dependency, making deregulation difficult and the timing of its removal hard to predict.

• Mitigation of the Balloon Effect: By broadly designating regulatory areas across all of Seoul and 12 regions in Gyeonggi this time, the government sought to significantly reduce the **Balloon Effect**, where demand shifts to adjacent areas to avoid regulation.
• Intrinsic Value and Stigma Effect: If the regulation is prolonged, areas with strong locational advantages, such as Apgujeong and Yeouido, may maintain relative strength without a significant price drop. On the other hand, there is concern that the designation of the LTP Zone itself acts as a 'Stigma Effect', where the government acknowledges the area's price appreciation potential, potentially leading to the side effect of prices surging when the regulation is lifted.

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3. The Dilemma in the *Jeonse*/Monthly Rental Market: Concerns over Reduced *Jeonse* Supply

The mandatory actual residency stemming from the LTP Zone designation may bring about a significant change in the *jeonse*/monthly rental market. As purchasing a house with a *jeonse* lease (gap investment) becomes impossible, the demand for purchasing houses for rental purposes itself decreases.

This ultimately leads to concerns about the reduction in *jeonse* properties that can be supplied to the rental market and the acceleration of the shift from *jeonse* to monthly rent. In fact, following past loan regulations, the market anxiety has increased, with both *jeonse* and monthly rental prices for apartments in Seoul rising simultaneously.

Government authorities anticipate that the impact on the *jeonse* market will not be significant as listings may become available when existing residents sell and look for other homes. However, the effect of new apartment complexes, a main source of rental contracts, or properties purchased for investment disappearing from the market will likely be difficult to ignore.

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4. Summary of Results: The War on Speculation, and Wise Response

The designation of the Land Transaction Permit Zone across all of Seoul will be highly effective in blocking speculative demand and completely banning gap investment. However, it comes with the dilemma of a short-term transaction cliff and increased instability in the *jeonse* market.

To avoid market panic due to high volatility, it is important not to view this regulation merely as a 'negative factor' but to approach it from the perspective of the market's intrinsic value and a long-term view. A wise strategy is needed that considers both the fact that demand suppressed during the regulation period in areas with solid locational advantages may explode upon deregulation, and the potential acceleration of structural changes in the *jeonse*/monthly rental market.

Key Summary:
The Land Transaction Permit Zone designation blocks speculative demand, cooling the market in the short term, but in the mid-to-long term, it causes structural changes in the *jeonse*/monthly rental market (accelerating the shift to monthly rent) and carries the possibility of a price rebound upon deregulation.

The content of this blog is for reference regarding investment judgment only, and investment decisions should be made under individual judgment and responsibility. In no case should the information in this blog be used as evidence for legal responsibility regarding investment outcomes.