No Reduction in Jeonse and Monthly Rent Even if Comprehensive Real Estate Tax is Lowered [Reporter’s Notebook]

The Best Policy for Tenants Is 'Expanding Housing Supply'

Photo by Asia Economy

Mr. A, who secured one apartment in Mapo-gu, Seoul, and another in Yeongdeungpo-gu after 35 years of working, was shocked when he saw a screenshot titled "2022 Expected Property Tax" posted in the apartment residents' chatroom earlier this year. The screenshot showed that the combined comprehensive real estate tax and property tax for cases similar to his were expected to amount to about 20 million KRW this year. Mr. A said, "Three years ago, I paid about 5 million KRW in property taxes, but now I have to pay most of my monthly rent income as property tax, which is absurd." Thinking he could not find a suitable additional source of income, Mr. A ultimately decided to raise the monthly rent in his next lease contract.

Punitive taxation targeting multi-homeowners and the so-called "property tax bomb" were by no means welcome news for tenants either. The burden of property tax was passed on to tenants, a phenomenon known as "tax shifting." In March, the Korea Economic Research Institute (KERI) analyzed in a report titled "Analysis of the Impact of Property Tax Increase on Housing Rent Increase" that "the recent increase in rental burdens is due to the sharp rise in property taxes being passed on to tenants." In the same month, Seoul City University published a paper stating that "when property taxes borne by landlords, such as property tax and comprehensive real estate tax, increase by 1%, about 30% of the increase is passed on to tenant households in the form of jeonse (key money deposit) guarantees."

While it is clear that property taxes are passed on to tenants, unfortunately, the opposite phenomenon does not seem to occur. Experts explain that due to extreme market distortions caused by regulations, normalizing the market is difficult with property tax relief alone. Since the introduction of the lease renewal request right, a dual pricing system has formed, and tenants wishing to renew their contracts must prepare deposits about 30-40% higher than before. With interest rates also rising, it is difficult to prepare the increased deposit. As a result, tenants reluctantly choose monthly rent, increasing demand for monthly rentals.

Experts unanimously agree that the only solution to ease tenants' burdens is to "expand supply." One expert said, "If there were sufficient supply from the start, there would be no room for dual pricing," adding, "In Daegu, where a supply boom is ongoing, such phenomena do not occur." He further stated, "While property tax relief and deregulation are desirable for tenants, ultimately, only expanding supply can stabilize the rental market." Minister Won Hee-ryong of the Ministry of Land, Infrastructure and Transport said during his nomination in April, "Protecting the housing vulnerable and tenants is the reason for the nation's existence." It is time to prove this reason through overwhelming housing supply.