Government’s real estate policies must change

It appears there will be an update to real estate policies. Citing the increasing instability of the housing market, President Moon Jae-in and ruling party leader Lee Hae-chan raised the need for stricter measures to curb speculation such as by clamping down on multiple home ownership and increasing taxes on returns on speculative investment. The ruling Democratic Party of Korea is planning to change a law to increase the Comprehensive Real Estate Holding Tax within this month.

The South Korean presidential office Cheong Wa Dae and the ruling party seem to attribute increasing housing prices largely to speculative investment by multiple home owners. In line with existing regulations, new measures focus on increasing the Comprehensive Real Estate Holding Tax and capital gain taxes, reducing tax benefits for landlords and decreasing demand for second home ownership.

When the government suggested increasing the maximum Comprehensive Real Estate Holding Tax to four percent on December 16 last year, it was met with opposition. Opponents pointed out that the new tax hikes did not consider home owners’ income or fluctuations in housing prices and penalized single home owners. Even the ruling party and the Office for Government Policy Coordination argued for cutting the Comprehensive Real Estate Holding Tax in the run up to the general elections. However, such push has lost momentum after the elections, undermining the public’s trust in the government and the ruling party.

The same goes for tax benefits. As part of its housing package released on August 2, 2017, the government promised to relieve the income, corporate and capital gain tax burden on landlords in exchange for mandating the minimum tenancy term and limiting rent increases to five percent. This was to stabilize the lump-sum housing lease market by increasing the supply. However, even though the package pushed up the number of landlords as intended from 330,000 in June 2018 to 523,000 in May 2020, the government wants to do a 180 because they think the tax benefits encourage multiple home ownership.

The government has introduced new property policies almost every month, but little has paid off. There are various reasons why previous measures did not work, but the biggest reason is the lack of public trust. While its housing policies have been turning into “housing politics” that fail to reflect market trends, housing prices have soared and the public has lost trust in its policies.

It has become clear that real estate policies, like any other policies, cannot override the market. The government will only repeat the same mistakes if it sees all home buyers as speculative investors and charge higher taxes every time property prices go up. It should change the direction and increase the supply where there is the demand no matter how long it takes.