[Editorial] The Unsettling Signs of Rising Monthly Rents

A Surge in Seoul Apartment Rents Raises Concerns
Sharp Increase Driven by Policy Changes and Tax Burdens on Multi-Homeowners

Changmoo Lee, Professor, Department of Urban Engineering, Hanyang University

Recently, there have been a series of reports about the rise in the monthly rent index for Seoul apartments, as published by Kookmin Bank. The main point is that the monthly rent growth rate for apartments in Seoul, which had been stable for a long period, surged to 0.8% last month. Similarly, the Apartment Monthly Rent Index provided by Real Estate 114, which has been tracked since 2003, also maintained a stable trend until it began to rise in July, recording a 1.3% increase by September. This shift toward rising monthly rents is cause for much reflection.

The sharp upward trend in monthly rents cannot be explained solely by the implementation of the Jeonse and Monthly Rent Cap System and the right to request contract renewal. There were similar surges in monthly rents in the past. For example, during the Roh Moo-hyun administration, the strengthened Comprehensive Real Estate Holding Tax (CRHT), introduced through the August 31 Measures at the end of 2006, triggered a spike in monthly rents. I recall President Roh Moo-hyun’s remark to the market, which had little sense of the severity of the strengthened CRHT at the time: “Once you receive the notice, you’ll be shocked by the amount.” From the time the tax was imposed, monthly rents began to rise, and by the time the CRHT was eased under the Lee Myung-bak administration, the cumulative increase in monthly rents had reached 20%. This is a textbook example of the pass-through effect of property holding taxes, caused by the strengthening of the CRHT on privately rented housing supplied by multiple-homeowners.

Currently, the full effect of the CRHT increase, which could reach as high as 6% as proposed in the July 10 Measures, has not yet materialized. Only the rapid adjustment of publicly announced property prices this year and the abolition of tax benefits for registered rental business operators have had an impact so far. In addition, just a few days ago, at a public hearing, the government presented an extreme policy combination that could raise the official property price realization rate for high-priced apartments to as much as 90%.

Ultimately, the recent rise in monthly rents is just the beginning. This can be understood as merely a precursor to the potential for severe upward pressure in the monthly rent market in the future. Furthermore, the sharp increase in operating costs for private rental housing owned by multiple-homeowners will further stimulate landlords’ desire to switch from semi-Jeonse or Jeonse, which lack sufficient cash flow, to guaranteed monthly rent contracts. Even now, with the Jeonse market destabilized by the implementation of the two new lease laws, if there is a rapid surge in monthly rents and an accelerated shift toward monthly rent contracts, the Jeonse and monthly rent market could approach a state of near-collapse.

The root of the problem lies in the government’s simplistic divide-and-conquer strategy, which targets multiple-homeowners and owners of high-priced homes-who are the suppliers of private rental housing-as the cause of surging housing prices, and seeks to discourage ownership and induce sales by increasing the CRHT burden. This policy has failed to stabilize the sales market and has only created a balloon effect in the mid- to low-priced housing market. Moreover, as a side effect of piecemeal regulatory tightening, the Jeonse and monthly rent markets have moved beyond mere instability.

The starting point for finding a solution is to recognize the reality that imposing greater burdens on multiple-homeowners, who supply private rental housing, inevitably leads to instability in the Jeonse and monthly rent markets, and to reconsider the issue from the ground up. One logical justification for the CRHT-provided it is not a punitive wealth tax-is that it can serve as an indirect means of taxing rental income in the domestic Jeonse and monthly rent market, which operates much like an underground economy. If this premise is accepted, there must be a fundamental reconsideration of what constitutes the maximum and reasonable level of taxation, based on the rental value, which represents the utility of the housing. Given that the rental yield for apartments in Seoul is currently below 2%, any tax rate exceeding this level cannot be considered reasonable under any circumstances. To reiterate, a CRHT that exceeds a reasonable level of taxation on the utility value of housing is not only punitive, but ultimately becomes a factor that undermines housing stability for ordinary citizens.