[7·10 Real Estate Measures] Expert: "Punitive Taxation May Serve as Venting, but Its Effectiveness Is Questionable" (Comprehensive)

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki and Minister of Land, Infrastructure and Transport Kim Hyun-mi are leaving the briefing room after announcing a comprehensive real estate plan, including strengthening the comprehensive real estate holding tax for multi-homeowners, at the Government Seoul Office in Jongno-gu, Seoul on the 10th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporters Yuri Kim, Donghyun Choi, Onyu Lim] Although the government sent a strong message of "one house, actual residence only" through the additional real estate measures announced on the 10th, experts unanimously expressed uncertainty about whether these measures will ultimately stabilize housing prices. In the market, voices are rising that the "punitive taxation targeting multi-homeowners" may serve as a venting mechanism but will not alleviate the anxiety of genuine buyers aiming to purchase their own homes. Rather, it is pointed out that this could lead to side effects that increase tax resistance.

The main points of the additional real estate measures announced by Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki on the day were to reduce the burden on low-income and genuine buyers, expand housing supply for genuine buyers, and strengthen real estate taxation on multi-homeowners and short-term transactions. The core measures included ▲applying a maximum comprehensive real estate tax rate of 6% for multi-homeowners ▲imposing a maximum 70% capital gains tax on short-term holdings ▲raising the capital gains tax surcharge rate for multi-homeowners to up to 30 percentage points for those owning three or more houses ▲and increasing acquisition tax rates for multi-homeowners and corporations.

Market participants and experts unanimously stated that "it is difficult to expect stabilization of the real estate market through tax measures alone." Although the government intends to curb speculative forces by raising the comprehensive real estate tax rate to a maximum of 6%, this is likely to increase the burden on multi-homeowners but will hardly bring immediate housing price stabilization or an increase in listings. The comprehensive real estate tax is already applied under the current tax law for this year's tax, as the tax base date (June 1) has passed.

Professor Kwon Dae-jung of Myongji University Graduate School of Real Estate pointed out, "Taxation cannot control real estate prices when they are rising." He analyzed, "If taxes are raised without increasing supply, the perception of future supply shortage will cause prices to rise again. Especially, the increased holding tax will be imposed next year, so it will not have a significant immediate impact on the market." Yang Ji-young, director of Yang Ji-young R&C Research Institute, also said, "From the perspective of wealthy multi-homeowners, they will not put their houses on the market just because taxes increase. They will rather choose to gift them."

Ham Young-jin, head of Zigbang Big Data Lab, explained, "Some may sell their properties, but it is highly likely that they will seek exit routes such as gifting during the remaining period until next year's tax base date," adding, "If they choose to hold on, the phenomenon of property listings being locked up will continue." Yoon Ji-hae, senior researcher at Real Estate 114, forecasted, "The monthly rent market is also unstable, and Seoul subscription rates are showing competition ratios of 100 to 1, indicating a high possibility of market rise in the second half of the year. Even if properties are put on the market, sellers will wait and list them in the first half of next year."

There was also criticism that strengthening the tax burden on multi-homeowners could signal them to switch to owning a "smart single house." The market dynamics could change as the demand side willing to own a smart single house absorbs the properties put on the market by multi-homeowners. This would diverge from the original intent of lowering real estate prices and stabilizing the market.

Experts argued that to solve the problem of property listings being locked up, which was a major cause of rapid price increases, exit routes should be provided to multi-homeowners by easing capital gains tax surcharges. However, the current measures include strengthening the surcharge rates. Previously, the basic tax rate (6?42%) was supplemented by a 10 percentage point surcharge for two houses and 20 percentage points for three houses, but under the new measures, the surcharge increases to 20 percentage points for two houses and 30 percentage points for three houses. However, this will be deferred until the comprehensive real estate tax imposition date next year (June 1, 2021). While this reflects the government's intention to send a consistent message to the market, it has been criticized for sacrificing policy flexibility to respond appropriately to market conditions.

Director Yang said, "The most immediate way to increase listings is to lower capital gains tax," adding, "If the capital gains tax surcharge is eased, stabilization can be expected through increased listings, but raising it will only cause the adverse effect of locking up listings." This is because the learning effect that holding on can yield capital gains has spread. Professor Kwon said, "The government's direction is to raise acquisition and holding taxes," and emphasized, "Rather than strengthening taxes, easing them to induce multi-homeowners to sell is necessary. Exit routes should be opened so that properties can be sold to the homeless, and measures such as reducing capital gains tax should be used to encourage sales."

Archive photo / Photo by Mun Ho-nam munonam@

There are also many shortcomings in reducing the burden on low-income and genuine buyers. The expansion of special supply only benefits 'specific genuine buyers,' and the share for 'other genuine buyers' is reduced to provide benefits to these groups. Lee Eun-hyung, senior researcher at the Korea Institute of Construction Policy, said, "The policy to expand special supply for first-time buyers and newlyweds excludes the natural situation where they purchase a small-sized residence suitable for their financial capacity and later expand the house size due to reasons such as having children. The expansion of special supply ultimately reduces the general sale volume accessible to them, causing reverse discrimination," and added, "Many dual-income couples still do not meet the income criteria for the 'low-income and genuine buyers' who are to receive a 10 percentage point preferential treatment on loan-to-value (LTV) and debt-to-income (DTI) ratios."

The registered rental business system supplement also maintains benefits for existing properties, so while it can prevent 'additional registration causing apartment listings to be locked up,' there is no solution for properties already locked up.

Experts emphasized that supply measures must be 'supply desired by demanders' in urban centers such as Seoul. They argued that measures including easing regulations on reconstruction and redevelopment should be prepared. Opinions were divided on lifting the greenbelt: some said partial lifting is necessary in already damaged Gangnam areas, while others insisted on prohibiting lifting to preserve urban green spaces. Seo Jin-hyung, president of the Korea Real Estate Society and professor at Gyeongin Women's University, said, "Development should be done where demand exists," adding, "The only way to increase supply is through redevelopment and reconstruction that raise floor area ratios, and urban redevelopment that builds compact buildings." Professor Kwon emphasized, "Three supply expansion measures are needed: easing reconstruction and redevelopment regulations, relaxing floor limits, and increasing floor area ratios."

There are also growing calls for fundamental reconsideration rather than 'follow-up measures' that merely supplement previous policies. Senior researcher Lee pointed out, "The announcement today mentioned the necessity of the system, noting the 'global low-interest rate trend and abundant liquidity that can flow into the housing market,' but the supplementary measures lack responses to this and mostly focus on raising taxes." Lab head Ham said, "To disperse demand, it is necessary to expand small-scale indirect investment options such as public REITs to provide a foundation for alternative investments."