Calls for Tax Benefits in the Seoul Metropolitan Area to Revitalize Markets

- The construction stabilization measures to be announced on the 19th: Industry calls for urgent tax benefits focused on non-regulated areas in the metropolitan area
- The 2013 'April 1 Real Estate Measures': Capital gains tax fully exempted for five years, with significant impact

Recently, the number of unsold houses after completion, known as 'malignant unsold housing,' has surged, raising concerns beyond the construction industry to the entire economy. The number of 'unsold houses after completion' has exceeded 20,000 units for the first time in 10 years, drawing industry attention to the construction stabilization measures to be announced on the 19th. There is a growing call for bold deregulation not only focused on local areas but also including non-regulated areas in the metropolitan area.

- The 2013 ‘April 1 Real Estate Measures’... “The effect was tremendous”

The 'April 1 Comprehensive Real Estate Measures' in 2013 provided a groundbreaking benefit of a full exemption from capital gains tax for five years, revitalizing the market. At that time, buyers of new and unsold houses priced under 900 million KRW received a five-year capital gains tax exemption, and first-time homebuyers also enjoyed acquisition tax exemptions.

Measures were also introduced the following year to support the market. The ‘July 24 Economic Policy Direction’ in 2014 proposed easing LTV and DTI regulations to stimulate the real estate market.

Those measures proved highly effective. According to data from the Korea Research Institute for Human Settlements, comparing the one year before and after the April 1 measures, the nationwide housing price change rate rose by 3.7 percentage points (from -2.2% to 1.5%), with the metropolitan area increasing by 5.6 percentage points (from -4.9% to 0.7%) and local areas by 1.8 percentage points (from 0.4% to 2.2%), highlighting a notable rise in the metropolitan area.

Housing transactions increased by 189,000 units nationwide during the same period (from 726,000 units to 915,000 units). The metropolitan area saw an increase of 130,000 units (from 269,000 units to 399,000 units), and local areas increased by 59,000 units (from 457,000 units to 516,000 units).

Those who benefited from the capital gains tax exemption at the time are often cited as ‘model cases’ of successful investment. It means they bought when others were not interested and made a large profit. For example, Mr. A, who purchased an apartment in Magok M Valley Complex 4 in Magok-dong, Gangseo-gu, Seoul, in June 2013 for around 400 million KRW, saw the house price (based on 2018 asking price) rise to 1.2 billion KRW, more than 2.5 times, but paid no capital gains tax. This was due to the temporary capital gains tax exemption implemented in 2013. Most people who bought apartments in Magok and Wirye New Town also saw prices more than double, benefiting greatly from the capital gains tax exemption.

An industry insider said, “Apartments that were bought hesitantly because of the capital gains tax exemption later became ‘cash cows.’ Since the government’s deregulation measures had a significant impact on restoring market sentiment, those who read the policy trends well and acted proactively during uncertain times ultimately received the greatest benefits.”

- Currently, deregulation efforts focus on local areas, but expansion to non-regulated areas in the metropolitan area is necessary

Although capital gains tax exemptions are not yet in place, regulations are gradually being eased mainly in local areas. However, there are concerns that this has limitations in leading to substantial market revitalization. Experts agree that progressive deregulation, including expansion to the metropolitan area and capital gains tax exemptions, is necessary.

In local areas, since January last year, ‘unsold houses after completion’ acquired have been excluded from the count of houses when calculating acquisition tax, capital gains tax, and comprehensive real estate tax. Starting this year, if a single homeowner purchases an unsold house after completion in local areas, capital gains tax and comprehensive real estate tax will be calculated under the ‘one household, one house’ benefit. Additionally, if the house is rented out for more than two years, the original acquisition tax for the housing construction business operator will be reduced by up to 50%. From this year, if a single homeowner newly purchases a house in a depopulated area, the ‘one household, one house’ special case will apply when levying property tax, capital gains tax, and comprehensive real estate tax. The target is apartments under 85㎡ in exclusive area and acquisition price under 600 million KRW. For the homeless or single homeowners buying houses priced under 400 million KRW in depopulated local areas (excluding metropolitan cities), acquisition tax can be reduced by up to half.

There are also opinions that the Debt Service Ratio (DSR) should be temporarily eased for unsold houses after completion in local areas. Since DSR limits loan amounts based on how much principal and interest can be paid relative to income, easing it could make it easier to secure funds for house purchases.

However, within the industry, criticism arises that “measures targeting only local areas are insufficient.” Although the number of unsold houses after completion in the metropolitan area is currently large but not as severe as in local areas, if the upward trend accelerates, the ripple effect could be much greater. Experts warn that without proactive deregulation in the metropolitan area, stable recovery of the overall real estate market will be difficult to expect.

An industry insider said, “The government is easing regulations mainly in local areas, but expanding to non-regulated areas such as southern and northern Gyeonggi and Incheon in the metropolitan area will maximize policy effects,” adding, “Since the impact of unsold houses is too large to be dismissed as a local market issue, more progressive measures are needed.”