[Square] Solutions to Real Estate Policy

Kim Jeong-sik, Professor Emeritus, Department of Economics, Yonsei University

Real estate issues are among the most important challenges in the Korean economy. Rising real estate prices can lead to wealth inequality, while a bubble collapse can trigger a financial crisis. Therefore, the Presidential Transition Committee and the new government need to identify the correct causes of past real estate policy failures and establish measures to stabilize real estate prices.

The biggest cause of real estate policy failure lies in responding to problems caused by housing supply shortages with demand suppression measures. Unlike in the past, housing demand increased due to the rise in single-person households, but supply was insufficient. Moreover, the government failed to recognize the growing demand for urban housing. As a result, the increasing housing demand was treated as speculative demand, and a flawed tax policy was implemented that reclaimed up to 80% of capital gains, causing housing prices to rise two to three times compared to five years ago.

It was also a mistake to push the one-household policy as a political solution. The government shifted the blame for real estate policy failures onto multi-homeowners and emphasized owning only one house. Multi-homeowners were labeled as speculators, while a system was implemented that granted up to an 80% reduction in capital gains tax and property tax to single-homeowners regardless of the size of the house or the amount of capital gains.

However, this policy undermined tax fairness rather than stabilizing housing prices. Owners of expensive single homes paid less tax, while owners of cheaper two homes bore a heavier tax burden. Additionally, by providing up to an 80% tax reduction benefit equally to single-homeowners regardless of housing price or size, owners of large or high-priced homes received enormous benefits, exacerbating wealth inequality.

Lastly, excess liquidity increased due to low interest rates is also a cause. With interest rates hitting record lows during the COVID-19 crisis, market liquidity surged significantly, which ultimately reduced the value of money and increased demand for tangible assets like real estate. The Bank of Japan maintained near-zero interest rates during its 20-year economic stagnation but did not significantly increase market liquidity until Abenomics was implemented in 2013, resulting in stable real estate prices. In contrast, the Bank of Korea excessively increased market liquidity alongside low interest rates, creating a real estate bubble and placing monetary policy in a dilemma.

The solution to real estate policy is first to build transportation infrastructure in the metropolitan area to disperse demand from downtown Seoul. Increasing housing supply through urban reconstruction is also necessary. However, this alone cannot meet the growing demand for moving to the city center due to the poor transportation infrastructure in the metropolitan area. Ultimately, expanding transportation infrastructure that connects workplaces in the metropolitan area to the city center is essential to disperse demand in Seoul and stabilize prices.

It is also necessary to change the tax base to ensure tax fairness. The basic principle of fair taxation is to tax based on monetary value. Taxation based on the number of houses rather than value can increase the role of interest groups or political influence. The new government should change the tax base for property holding tax and capital gains tax from the current number of houses to the total value of owned houses to implement fair taxation. Tax reduction benefits for single-homeowners should also be differentiated according to the size or value of the owned house to enhance tax fairness, reduce demand for a single "smart" house, and stabilize real estate prices.

Unlike advanced countries, real estate accounts for a large proportion of household assets in Korea. If real estate policy fails, wealth inequality will worsen, and with rising prices and wages, the Korean economy will suffer significant damage. Now is a time when the correct choices regarding real estate policy by the Transition Committee and the new government are more important than ever.

Kim Jeongsik (Professor Emeritus, Department of Economics, Yonsei University; Former President, Korean Economic Association)