The tail cannot wag the dog

Jang Deok-jin

The author is a professor of sociology at Seoul National University. 

There was once a popular joke by a Korean comedian: "Feeling good? Then you'll probably go eat beef."

No matter the question — "What will you do if you get a raise?" "What if your children do well in school?" "What if your parents stay healthy?" — the comedian always replied in a deadpan Gyeongsang dialect, "Feeling good? Then you'll probably go eat beef."

The joke worked because it reflected Koreans' fondness for beef. During the Covid-19 pandemic, when the government distributed emergency relief payments, the joke proved remarkably accurate. Families that received 1 million won ($660) in relief funds rushed to butcher shops. Even in my small neighborhood, new meat shops opened and existing ones hired extra workers. Since then, cash-based welfare programs have continued under various names, and each time people received unexpected money, beef remains one of the most popular purchases.

But what if the windfall is much larger? Suppose someone suddenly gains 100 million won or even 500 million won. Then, the comedian's answer would probably change: "Feeling good? Then you'll probably buy real estate."

The Lee Jae Myung administration has used virtually every available tool to suppress the housing market while portraying property speculation as a moral problem. Owners of multiple homes have been blamed for driving young people to abandon marriage and childbirth, and President Lee has argued that capital tied up in real estate should instead flow into financial markets to support productive investment.

The result has been quite different. According to data recently released by the Ministry of Land, Infrastructure and Transport, investors sold 3.7 trillion won worth of stocks and bonds this year to finance property purchases. Instead of strengthening productive finance, gains made in the capital market have flowed directly into real estate.

Much of the money has gone to Seoul's affluent Gangnam, Seocho and Songpa districts. As many economists predicted, tighter mortgage regulations have mainly shut out ordinary buyers while enabling cash-rich investors who profited from rising stock prices to purchase expensive homes. Apartment prices in Seoul have reached record highs, while housing costs near Samsung Electronics and SK Hynix semiconductor facilities in Gyeonggi have risen even faster. Even an unusual labor campaign advocating "one-over-N" work sharing ultimately produced another familiar result: more money flowing into property.

Why does this keep happening? Why do stock market profits and generous performance bonuses eventually find their way into real estate?

Because policymakers are trying to make the tail wag the dog.

Tax policy should be designed around the existing structure of household wealth. Instead, the government has attempted to reshape that structure by restricting credit and increasing the burden on property owners. Such policies inevitably create unintended consequences. Markets are the dog. Taxes and regulations are the tail. Reversing that relationship cannot succeed.

Now attention has turned to higher property holding taxes. President Lee has argued that Korea's holding taxes remain low by advanced-country standards, while the deputy prime minister has suggested an increase could be considered. Supporters point to Korea's relatively low effective holding tax rate.

That comparison, however, ignores household balance sheets. Homeowners care less about statutory tax rates than about the taxes they actually pay. Imagine two countries with identical 5 percent property taxes. In the United States, where real estate accounts for roughly 30 percent of household assets, the tax applies to a much smaller base. In Korea, where housing represents nearly 80 percent of household wealth, the same rate produces a far heavier burden. Even if Korea's tax rate were only half that of the United States, many homeowners could still pay more in practice because so much of their wealth is concentrated in property.

This explains why many Organisation for Economic Cooperation and Development countries keep holding taxes relatively low when housing occupies a large share of household assets, while relying more heavily on such taxes where real estate makes up a smaller portion of wealth. Korea also imposes comparatively high acquisition and capital gains taxes, meaning its overall tax burden on real estate is not unusually low. Proposals to raise holding taxes only on luxury homes face another practical question: If wealthy owners sell because of higher taxes, who will be able to afford those properties?

No matter how creative policymakers believe they are, the tail cannot wag the dog. Governments cannot overpower markets through pressure or moral condemnation alone. Rather than stigmatizing certain groups of citizens, they should pursue balanced, historically-tested policies with consistency and a long-term perspective.