[Insight & Opinion] Solutions to the Polarization of Housing Prices

The polarization of housing prices is intensifying. Not only is there a growing gap between Seoul and other regions, but the disparity between Gangnam and Gangbuk within Seoul is also widening. For the standard 84㎡ apartment, older apartments in Gangbuk are priced around 900 million KRW, while in Gangnam, prices have soared up to 3 billion KRW, and newly built apartments have recently been traded for as much as 6 billion KRW.

Excessive polarization of housing prices not only deepens wealth inequality and becomes a source of social unrest but also lowers workers' motivation due to the discouragement caused by the unbridgeable gap, which calls for caution. Particularly, while countries like the United States and Japan hold 20-30% of household assets in real estate, Korea's figure is as high as 80%, raising concerns about the worsening of wealth inequality. It is urgent for the government to devise measures to alleviate housing price polarization.

First, transportation infrastructure in low-income residential areas must be expanded, as housing prices are closely related to infrastructure. As the saying goes, areas with good transportation, distribution, and educational infrastructure tend to have high housing prices. Transportation infrastructure is especially important because housing can only fulfill its role when combined with transportation infrastructure. While private construction companies can build houses, transportation infrastructure such as roads and tunnels is supplied by the government. Most areas with high housing prices, including Gangnam in Seoul, have well-established infrastructure, whereas many low-income residential areas and parts of the metropolitan area suffer from poor transportation infrastructure.

So far, the government has supplied housing only in new towns in the metropolitan area to stabilize housing prices but has not expanded transportation infrastructure leading to workplaces in Seoul. As a result, the more new towns are built, the longer it takes to enter Seoul, increasing housing demand in Seoul and deepening polarization. Therefore, the government should focus on expanding transportation infrastructure in the metropolitan area and low-income residential areas. New above-ground or underground rail lines should be established, and bridges and tunnels causing bottlenecks when entering Seoul should be expanded. By dispersing housing demand away from central Seoul so that living outside the city center is not inconvenient, prices can stabilize, and polarization can be alleviated.

Another solution is reforming the tax system. The current real estate taxation system tends to exacerbate wealth inequality. The comprehensive real estate holding tax (종합부동산세, Jonghap Budaesan Se) includes tax reduction measures for single-homeowners and the elderly, where elderly owners who have held a property for 15 years can receive up to a 90% reduction in this tax regardless of the property's high value.

A bigger problem lies in the capital gains tax, specifically the long-term holding deduction system for transfer income tax (양도소득세, Yangdo Sodeuk Se). This system grants an 80% deduction on capital gains to single-homeowners who have held and lived in the property for 10 years, regardless of the size of the capital gain. Providing tax benefits to single-homeowners is desirable, but unlimited deductions regardless of the capital gain amount need improvement. It is necessary to differentiate deduction benefits based on the size of the capital gain. Recently, the number of high-priced homes worth over 5 billion KRW has increased. If a homeowner realizes a capital gain of 10 billion KRW and deducts 80% (8 billion KRW), paying tax only on the remaining 2 billion KRW, the homeowner gains an enormous profit of 8 billion KRW tax-free, which exacerbates wealth inequality.

Moreover, to exploit these institutional benefits, demand for so-called ‘smart single homes’ in specific areas where prices can rise increases, driving up housing prices and worsening polarization. The government and the National Assembly must differentiate deduction benefits based on the size of capital gains, even for single-homeowners, to resolve housing price polarization.

Economic inequality includes income inequality and wealth inequality. Income inequality can be alleviated through economic recovery or wage increases. However, wealth inequality is large in scale and difficult to reduce. If wealth inequality worsens, people demand a larger government and socialist tendencies strengthen, making it difficult to maintain a capitalist system. Considering that the 1949 land reform was ultimately a reform measure to alleviate wealth inequality, the government and the National Assembly must hasten to prepare measures to ease housing price polarization.

Jungsik Kim, Professor Emeritus, Department of Economics, Yonsei University