Higher property taxes require lower transaction taxes

Despite the government’s series of powerful regulatory measures since last year, there are few signs that the housing market in the Seoul metropolitan area is stabilizing. What began as a surge in prices in Seoul’s affluent Gangnam District and neighborhoods along the Han River has spread to surrounding areas. Home prices, jeonse (lump-sum deposits) and monthly rents are now rising simultaneously, creating what many describe as a “triple hit.”

Kim Yong-beom, the presidential chief of staff for policy, apologized on Saturday, saying he was sorry for the difficulties many people are facing.

The problem is that the government still appears overly focused on suppressing demand and implementing short-term remedies. Following tighter lending rules and an expansion of land transaction permit zones, officials are expected to unveil tax measures later this month, including higher property taxes. The new policies are likely to target extremely expensive homes and properties that are not owner-occupied.

Kim suggested that even a single owner-occupied home should be treated differently if its value is exceptionally high.

Whether the proposed reforms are reasonable and effective in stabilizing the market will depend on their details. What should be avoided, however, is a one-sided and punitive increase in the tax burden.

As many experts noted at a government forum last week, harsher taxes could provoke resistance, encourage landlords to pass costs on to tenants and reduce the number of homes available for sale. Although Korea collects a smaller share of GDP in property taxes than the average member of the Organisation for Economic Cooperation and Development (OECD), transaction taxes such as acquisition taxes are far higher than the OECD norm.

If the government intends to raise property taxes, it should also reduce transaction taxes, as international organizations have long recommended. Only then can the tax system become fairer and more efficient. Any reduction in capital gains tax benefits for owners of nonowner-occupied homes should also take into account exceptional cases in order to preserve public trust.

Above all, the government must acknowledge that suppressing demand alone will not bring housing prices under control and present more ambitious supply measures.

Kim has previously argued for expanding the housing supply. Yet he has expressed reservations about revitalizing redevelopment and reconstruction projects, effectively the only way to increase housing supply in Seoul, because they would temporarily reduce the number of available homes while residents relocate.

Housing policy in the metropolitan area cannot be designed with only the next year or two in mind. Expanding supply on a meaningful scale will be difficult without private sector participation.

Before announcing its tax reform package later this month, the government plans to hold a comprehensive housing forum chaired by President Lee Jae Myung on Thursday. To dispel criticism that the outcome has already been decided, it should listen to a broader range of opinions and reflect them in policy.