As home prices continue to rise, the government has left open the possibility of medium- to long-term increases in property holding taxes. Rather than abrupt rate changes, it said it will pursue tax rationalization based on the "ability-to-pay principle" and "public acceptability."
The market is taking it as a signal of a gradual expansion of the tax burden. With local elections in June next year, some analysts say the government is being cautious about the extent of tax adjustments, mindful of potential political backlash.
In its "measures to stabilize the housing market" announced on the 15th, the government said it would prepare plans to rationalize real estate taxes by comprehensively considering guidance of funds to productive institutional sectors, the ability-to-pay principle, and public acceptability. The measures specifically mention "adjustments to holding and transaction taxes." If the real estate market continues to overheat, it means the government will consider raising holding taxes such as the comprehensive real estate tax and the property tax while lowering transaction taxes.
Currently, Korea's dwellings holding taxes are divided into the property tax and the comprehensive real estate tax. The property tax uses 60% of the posted price as the tax base, with rates of 0.1% to 0.4%. For the comprehensive real estate tax, a rate of 0.5% to 1.0% applies to the portion exceeding 900 million won in posted price for single-home households, while multi-home owners can be charged up to 5.0%.
Until now, the government has focused on non-tax policies such as tighter loan regulations and expanded supply to stabilize the real estate market. It then raised the level of its response by citing the tax card as a "last resort." Because tax hikes during the Roh Moo-hyun and Moon Jae-in administrations were seen as having spurred increases in home prices, it had been cautious about tax reform, but as price gains continue in key areas such as the Han River belt, a consensus appears to have formed that there is a need to sound a "warning."
Koo Yun-cheol, Deputy Prime Minister and Minister of the Ministry of Economy and Finance, said at the National Assembly's Strategy and Finance Committee audit the previous day, "We are continuing internal reviews, but the market is highly sensitive to tax policy." Koo emphasized, "Rather than artificially suppressing demand through taxes, we are placing emphasis on maintaining appropriate prices through expanded supply."
However, Kim Yun-duk, Minister of the Ministry of Land, Infrastructure and Transport, said shortly after taking office last month that "strengthening holding taxes is an unavoidable task." Taking stock of the internal mood across ministries, it effectively means tax reforms are no longer taboo and are being kept open as one of the tools for "market stability."
The Ministry of Economy and Finance is more likely to first consider indirect measures to strengthen holding taxes, such as adjusting the fair market value ratio (fair ratio) or the posted-price realization rate, rather than raising tax rates. If the fair ratio, which was lowered from 80% to 60% during the Yoon Suk-yeol administration, is restored to around 80% or the posted-price realization rate is raised, the tax burden can increase without raising rates.
An official at the Ministry of Economy and Finance said, "Rather than looking at specific items such as rates, deductions, or the fair ratio in isolation, the intent is to review the real estate tax system comprehensively from a long-term perspective," adding, "We are also reviewing whether the direction of 'raising holding taxes and lowering transaction taxes' is appropriate." The official added, "We are internally discussing forming an inter-ministerial task force (TF) in parallel with commissioning research."
However, the tax reform discussion is still in its early stages, and the specific timing or method has not been decided. Within the Ministry of Economy and Finance, the prevalent view is that an official announcement within the year will be difficult. With local elections next year, the judgment appears to be that discussions of tax hikes that could stir voter sentiment in key areas such as Seoul's Han River belt carry significant political risk.
Experts believe the government is likely to gradually increase the tax burden by adjusting the fair market value ratio under the banner of "normalizing holding taxes."
Park Hap-soo, adjunct professor at Konkuk University's Graduate School of Real Estate, said, "The basic direction of tax reform should be to strengthen holding taxes and ease transaction taxes," adding, "If holding taxes are normalized to a certain level and the excessive capital gains tax burden is lowered, listings will circulate in the market."
He continued, "During the Moon Jae-in administration, the fair market value ratio was raised to 100%, and the Yoon Suk-yeol administration lowered it to 60%, so restoring it to around 80% can be seen as an adjustment in the name of 'normalization,'" adding, "Because this method is possible without amending laws, it is the easiest card for the government to use."
Ko Jun-seok, a professor at Yonsei University's Sangnam Institute of Management, said, "The government is more likely to pursue a gradual expansion of the tax burden by raising the fair market value ratio rather than directly increasing tax rates," adding, "While specific action is more likely to be pushed back until after next year's local elections, given the government's stance, it seems difficult to avoid a long-term direction of raising holding taxes."