[Public Voices] Holding Taxes Moving Opposite to Housing Prices

Dongwon Lim, Research Fellow at Korea Economic Research Institute

According to the Moon Jae-in administration’s “Plan to Realize Publicly Announced Prices” aiming to align publicly announced prices up to 90% by 2030, the realization rate of publicly announced prices rose from 69.0% in 2020 to 71.5% in 2022. However, recently, due to falling housing prices, many cases have emerged where the actual transaction prices of houses are lower than the publicly announced prices. Publicly announced prices serve as the basis for imposing real estate-related taxes (property tax, comprehensive real estate tax, etc.), which increased by 19% last year and 17.2% this year. The reversal phenomenon between publicly announced prices and actual transaction prices is expected to trigger tax resistance, and the number of comprehensive real estate tax appeals filed with the Tax Tribunal has surged about 14 times compared to last year, reaching 3,843 cases by September. This year, the estimated number of taxpayers for the housing portion of the comprehensive real estate tax is 1.2 million, a 29% increase from last year. The housing portion of the comprehensive real estate tax amount sharply increased from 400 billion KRW in 2017 to the 4 trillion KRW range. The increase in taxpayers and tax amounts despite falling housing prices is due to the Moon Jae-in administration raising the burden of holding taxes as part of real estate measures, and the government’s attempt to introduce a “3 billion KRW additional special deduction for one-homeowners” this year was scrapped during the National Assembly discussions.

As a result, the steep realization of publicly announced prices has caused a rapid increase in the burden of real estate holding taxes, especially this year’s comprehensive real estate tax, where the combination of price realization and tax rate hikes has led to excessively high tax burdens. In response to the unexpected housing price decline, the government adjusted the realization rate of publicly announced prices back to the 2020 level to ease the tax burden, but legislative relief for the comprehensive real estate tax has failed to pass the National Assembly due to opposition from opposition parties, making it a half-measure at best. Furthermore, judging that the housing market slump is severe, the government announced comprehensive deregulation measures such as lifting regulations in the metropolitan area except for four places including Seoul and Gwacheon, and advancing the easing of Loan-to-Value (LTV) ratios, but easing the burden of real estate holding taxes still seems a long and difficult road. The problem lies in the possibility of a prolonged housing price decline. Due to rapid interest rate hikes and economic slowdown expected until next year, buyer sentiment is expected to weaken, continuing the housing market slump. With the economic slowdown worsening people’s financial situations, criticism has increased that only real estate taxes are rising.

One reason for the previous administration’s increase in real estate holding taxes was that the ratio of holding taxes to GDP (0.8% in 2016) was lower than the OECD average (1.0%), but by 2021, it exceeded the OECD average at 1.22% compared to 1.07%. Including transaction taxes, the overall asset taxation in Korea is 3.98% of GDP, which is 2.5 times higher than the OECD average of 1.6%, ranking joint first with France. Korea is now internationally recognized as a country with an excessive real estate tax burden and needs to ease it.

“Publicly announced prices” and “tax rates” are directly linked to taxes, and during periods of real estate price decline, the pain from price drops also increases. With a real estate market slump expected for several years ahead, if the burden of real estate holding taxes remains at a level that is too heavy, negative effects such as prolonged stagnation and tax resistance will increase. Therefore, not only should the realization of publicly announced prices be put on hold, but the tax rates of the comprehensive real estate tax should be reduced to the levels before 2018. The heavy taxation system on multiple homeowners should also be abolished to increase the supply of reasonably priced properties. Taxpayers who cannot bear the increased tax burden must dispose of their homes, but the current capital gains tax surcharge on multiple homeowners blocks this. Therefore, to revitalize the real estate market, excessive transaction taxes (acquisition tax) and capital gains taxes should also be reduced.