[Inside Chodong] The Failed Comprehensive Real Estate Holding Tax Now Needs Reform

Blaming Soaring Housing Prices on Speculation Is a Misdiagnosis
A Shift Toward Fairness in Property Holding Taxes Is Needed

"I will stake my presidency to eradicate speculation."

In April 2003, shortly after taking office, President Roh Moo-hyun declared a war on speculation during a speech at the National Assembly. At the time, to overcome the foreign exchange crisis, interest rates were lowered and welfare spending increased, flooding the market with liquidity. With nowhere else to go, this capital surged into real estate, causing housing prices in Seoul, especially in Gangnam, to soar uncontrollably. The Roh administration, under the banner of rooting out speculative forces, focused more on suppressing demand than expanding supply, even creating the unprecedented comprehensive real estate holding tax. Because it emerged from study groups that repeatedly discussed Henry George's "Progress and Poverty," which advocates the concept of public land ownership, the tax was criticized as an "ideological tax." It was also called the "Gangnam tax," as even owning a single unit in Dogok-dong's Tower Palace made one subject to the tax. The term "tax bomb" was coined at this time, as the administration insisted that speculation must be eradicated with heavy taxation, akin to dropping a bomb.

The comprehensive real estate holding tax became a burden on the middle class during the Moon Jae-in administration. President Moon declared, "We will never lose the war against speculation," and wielded the tax even more aggressively. By raising the top tax rate for owners of multiple homes and introducing a complex progressive structure, the burden of the tax increased significantly. The administration's all-encompassing, ultra-strong regulatory measures led to pent-up demand, and housing prices continued to rise sharply. At one point, even owning a single 30-pyeong apartment in Seoul made one subject to the tax, and the number of taxpayers exceeded 1.2 million. When the conservative Yoon Suk-yeol administration took office, the law was revised to reduce the tax burden. Since its introduction in 2005, this incomplete tax has been amended 13 times over 21 years, swinging back and forth depending on changes in government and political interests, and still remains in need of an overhaul.

Two progressive administrations have produced a learning effect. When regional and lending regulations lose their effectiveness, a verbal warning is followed by a comprehensive real estate holding tax bomb. President Lee Jaemyung is now vowing to curb unproductive speculative demand, signaling an increase in property holding taxes by stating, "We will mobilize all available policy tools and capabilities." Deputy Prime Minister and Minister of Economy and Finance Koo Yooncheol has also hinted at strengthening the tax burden on single-home owners, saying, "Could you withstand a 50 million won tax on a 5 billion won apartment?" Both within and outside government circles, it is widely accepted that after next year’s local elections, an increase in property holding taxes centered on the comprehensive real estate holding tax is inevitable. Excessive real estate price increases relative to income undermine the normal flow of economic activity. There is also an aspect where government regulation becomes unavoidable due to an overheated market. However, the logic of raising taxes to catch speculative forces driving up housing prices is flawed from the outset.

The current money supply in circulation, measured by M2, stands at 4,400 trillion won, an all-time high. A 1% increase in money supply results in a 0.9% rise in housing prices within a year. For the time being, money is abundant and houses are scarce. As the value of all assets, including gold, Bitcoin, and stocks, rises, the middle class and ordinary citizens, concerned about asset inflation, are flocking to real estate, which is considered the safest asset. Scrambling to buy a home, especially one likely to appreciate, is a desperate attempt to avoid sudden impoverishment and defend asset value. Treating these people as speculators and trying to crack down with tax squads will not solve the problem. Progressive administrations have misused taxes as a tool, and the comprehensive real estate holding tax, which has become a means of combating speculation, has only led to soaring housing prices and market distortion. If the Lee Jaemyung administration pursues a tax reform that raises property holding taxes while lowering transaction taxes, it should not be positioned as a tool for housing market stabilization, but rather as a fundamental reform for fairness in asset holding taxes, consistently implemented.