An unsolvable riddle seems to be the right way to describe the current real estate policies and the ensuing national backlash in South Korea. Since his inauguration in May 2017, South Korean President Moon Jae-in has attempted to stabilize housing prices with several measures that have mainly targeted housing speculation. However, the administration’s 21 rounds of real estate policies announced over the past three years have faced intense criticism for not curbing rising housing prices.
On July 10, the South Korean government announced its twenty-second set of real estate measures, roughly one month after its last policy statement announced on June 17, which has had no effect on the increasing housing prices. The new measures target owners of multiple homes by imposing higher taxes, including transfer tax, comprehensive real estate tax, and acquisition tax. With these measures, the government expected that the owners of multiple houses would have no choice but to sell some, which would increase the supply of houses and eventually lower housing prices.
In particular, transfer tax was expected to rise to a maximum of 72 percent from the current 6 to 42 percent. Homeowners would also face higher comprehensive real estate tax, increasing to 1.2 to 6 percent from the current 0.6 to 3.2 percent . Furthermore, acquisition tax was raised from 1 to 4 percent to 8 to 12 percent. Due to these significant increases in taxes, multi-homeowners will now face a severe financial burden if they retain possession of all of their houses.
The Limitations of the Real Estate Measures
Unfortunately, these new real estate measures encountered immediate opposition from ordinary citizens. On July 18, 500 people held a rally protesting against the side effects of the new regulations at the main center of the Korea Deposit Insurance Corporation (KDIC) in Jongno. They were angered at the financial burden the recent announcement would place on their daily lives. The protesters claimed that they have become the victims of an all-out tax bomb that targeted not only multi-homeowners but also those possessing only one or no homes. This refers to the fact that the new announcement mandates even those with only one house in Seoul to pay higher comprehensive real estate tax if their residence area is declared speculative by the Ministry of Land, Infrastructure and Transport (MOLIT).
In fact, there have been increasing calls for the Moon administration to entirely review its policies on real estate because they have not produced the intended effects. According to the Korea Herald, the Citizens’ Coalition for Economic Justice (CCEJ) released a report on June 23 analyzing 80,000 apartment units in 34 areas of Seoul, which concluded that the average price of 25-pyeong apartments during the t h r e e y e a r s o f t h e M o o n administration had surged by 450 million won. The report clearly illustrates that the regulation-driven policies are in fact not only failing to stabilize the rising prices but are also backfiring, leading to more dramatic spikes.
According to Professor Kim Jun Hyung (Department of Real Estate, Myongji University), it remains uncertain if the new measures would lead to market stabilization. This is because housing prices are determined by numerous factors that cannot be perfectly controlled by government intervention. Also, one of the serious problems with the newly announced July 10 measures is that they overly regulate private rental property business. The government has abolished the apartment rental business system, viewing that it can aggravate the housing speculation. Kim emphasized that this business provides nearly 30 percent of quality homes for citizens. He explained that the new measures would negatively influence even those with no home if the rental property business is to be shut down.
A Paradigm Shift Is Needed
A repeated cycle in real estate prices has been reported over the past three years, during which the policies have changed nearly 20 times — a temporary drop in prices after the newly released measures and a steep rebound shortly thereafter. According to Professor Kim, a fundamental paradigm shift is needed when the government deals with the real estate issues. “Rather than focusing on stabilizing housing prices, the government should strive to ensure residential stability for every citizen. Thus, I would like to suggest a shift of approach from housing price stability to residential stability,” he stated.
Residential stability is where everyone can find a proper place to live, whether the housing prices go up or down. Professor Kim expressed his concerns about the entire nation being obsessed with the ups and downs of the housing prices when the more important issue at hand is fostering a constructive system that enables every citizen to afford their own house. As a basic principle, he suggested that the banks fill in the gap between the price of the house and a prospective homeowner’s savings by providing long-term loans to ordinary citizens.
This way, everyone will be able to afford a house of their own, which ensures their residential stability by allowing them to pay off their loans over the rest of their lives. The bank should lend enough money to every individual as long as the level of debt to income (DTI) can be maintained at below 30 percent. The government should provide subsidies to banks and further facilitate the participation of private companies in providing rental houses at affordable prices, thus increasing the supply of houses as well. Professor Kim noted that rental property business should be regarded as an indispensable tool to expand housing opportunities for ordinary citizens, not as the evil that causes price upheaval.
Statistics have proven that the current administration’s regulation-driven measures have backfired, exacerbating the economic hardship of citizens. As many experts have pointed out, punitive taxes aiming to suppress the demand for houses without guaranteeing a sufficient supply may breach market principles. Indeed, because it is vital that the government consider the practical living needs of its citizens, now may be the time to reform domestic real estate policies from scratch.