[The Editors' Verdict] Will Raising the Holding Tax Really Control Gangnam Property Prices?

Let's assume you own one home each in Songpa and Mapo in Seoul, and in Gyeonggi Province. Next year, the property holding tax (comprising the property tax and the comprehensive real estate tax) will be raised to 1%. (Deputy Prime Minister and Minister of Economy and Finance Koo Yuncheol stated, "If the holding tax is set at 1%, and if your home is worth 5 billion won, paying 50 million won a year would be unsustainable.") Given this, you decide to sell one of your properties. Which one should you sell first? And what should you do with the proceeds?

Many people would likely start by selling their lower-tier properties. The cash they secure would probably be poured into purchasing a top-tier apartment. After all, isn't owning a "smart single property" important to everyone? While the government has imposed restrictions on loans and transactions, it cannot block transactions for actual residence. Despite the October 15 measures, which layered regulations across all of Seoul and major areas in Gyeonggi Province, transactions in premium locations such as Gangnam have increased, and record-high prices are being reported in various places. This supports the scenario described above. The government may hope that this money will be invested in the stock market, but that is another matter.

If the adjustment to the holding tax is as drastic as the October 15 measures, such trends are likely to become the norm. Demand for premium locations will rise, and home prices there will soar once again. Meanwhile, the supply of properties in mid- to lower-tier areas will increase. If demand has already been suppressed and the number of listings rises, prices in those areas will drop sharply. In a short period, the polarization of home prices will only widen further.

This situation may not remain just a scenario. Eight years ago, the government introduced the "Housing Rental Business Activation Plan" to stabilize the rental market. This policy offered various tax benefits to multi-home owners to secure more rental units. Within a year, 407,000 people registered as rental housing business operators, an increase of 148,000 from the previous year. The expiration date for their tax benefits is next year. If the holding tax is raised, their "asset liquidation" and rush to secure a "smart single property" will inevitably accelerate.

If home prices in Gangnam rise, the October 15 measures will become meaningless. One can already hear the complaints of citizens who own homes in Nowon-gu, Dobong-gu, Gangbuk-gu, Geumcheon-gu, Gwanak-gu, and Guro-gu-areas designated as regulated zones despite stagnant home prices.

At least, these complaints can be set aside for now. It cannot be said that preventing the rise in home prices from Gangnam to areas like Nowon, Dobong, and Gangbuk was a mistake. However, how will the government address the frustration of young people who are forced to spend exorbitant amounts on housing due to a shortage of rental units and the resulting shift from rental to monthly leases, or the sighs of newlyweds who can no longer afford a home in Seoul? Public trust in policy will plummet.

If Gangnam home prices surge further, the effect of the holding tax hike will disappear. It may even backfire. The Korea Local Tax Institute, in its 2021 report "Directions for Restructuring the Holding Tax System to Define the Roles of Property Tax and Comprehensive Real Estate Tax," analyzed, "Even if property tax rates are raised in the short term, if the expected rate of return from rising real estate values is large enough to offset the increased tax burden, it is only natural that home values will rise."

At the end of last month’s parliamentary audit, Minister of Land, Infrastructure and Transport Kim Yoonduk said, "There is a need to increase the holding tax." However, with local elections just around the corner, experts believe it will be difficult to touch the tax system for the time being. Perhaps that's for the best. The situation must be carefully reviewed and considered. Those who suddenly found themselves impoverished will surely hold the government accountable.