Repeating Moon Administration's Mistakes? Trends in Listings Before and After Heavier Capital Gains Tax

First Round of Heavier Taxation: Transactions Plunge by 53%
Second Round Tightening: 70% Drop in Just Two Months
"Freeze in High-Priced Apartment Listings Becoming Entrenched"

There are concerns that reintroducing the heavier capital gains tax on owners of multiple homes could once again lead the market into a 'transaction freeze → supply lock-up' pattern. During the Moon Jae-in administration, when the increased capital gains tax was implemented and strengthened, the volume of apartment transactions in Seoul plummeted, and liquidity in the market quickly froze as homeowners delayed selling their properties.

The heavier capital gains tax for owners of multiple homes was first introduced in 2004 during the Roh Moo-hyun administration. However, it was suspended in 2009 due to a sluggish housing market and was completely abolished in 2014. The policy was revived five years later under the Moon Jae-in administration as housing prices soared. In the August 2, 2017 policy, the Moon administration announced that for owners of two homes in regulated areas, an additional 10 percentage points would be added to the basic tax rate (then 6-42%), and for those with three or more homes, 20 percentage points would be added. The policy was set to take effect on April 1, 2018, with an approximately eight-month grace period.

According to KB Real Estate statistics on January 26, in the first quarter of 2018, just before the policy took effect, the number of apartment transactions in Seoul surged to 36,533 as people rushed to complete last-minute deals. However, in the second quarter, immediately after implementation, transactions dropped sharply by 53% to 17,062. There was a brief rebound to 25,934 in the third quarter, but it fell again to 17,093 in the fourth quarter. By the first quarter of 2019, the number had plummeted to 5,326, marking the onset of a full-fledged transaction freeze.

The situation in 2021, when the tax rate was raised even further, was even more severe. Through the July 10, 2020 policy, the government increased the additional tax rates to 20 percentage points for two-home owners and 30 percentage points for those with three or more homes, while also eliminating the long-term holding special deduction. Although the policy was implemented in June 2021, the market froze immediately after the announcement. In July 2020, there were 16,002 apartment transactions in Seoul, but this dropped to 6,880 in August and 4,795 in September-a 70% decrease in just two months. The mere announcement of the policy effectively locked up the supply.

By the time the policy was actually implemented in June 2021, transactions had already shrunk to around 4,240. The market did not recover afterward, and by September 2022, the number had dropped to just 856, setting a new record low.

In both cases, the same pattern was observed: a surge in last-minute transactions before implementation, a sharp decline in transactions immediately after, supply lock-up, and then a rise in housing prices. The annual increase in Seoul apartment prices was 8.03% in 2018 and 8.02% in 2021. According to a study published by the Korea Research Institute for Human Settlements in May 2024, a 1% increase in the capital gains tax rate leads to a 6.9% decrease in transaction volume and a 0.2% increase in sale prices.

An official at a national research institute, who requested anonymity, said, "The idea that you can stabilize the market by using taxes to induce owners of multiple homes to sell is a one-sided view. Owners of multiple homes have several options, such as raising rents or simply holding on to their properties instead of selling." He added, "On the contrary, prices may rise even further, and the phenomenon of extreme polarization, where expensive apartments become even more expensive, could intensify."

Regarding the announcement of the policy with only about three months left before the grace period ends, the official commented, "Policies have inertia, and sudden changes can create confusion in the market. In particular, supply lock-up could become entrenched, especially for high-priced apartments."