"This will blow up someday. We don't know in which generation or who will be hit, but it will deliver a huge shock to Korea. If it blows up, it will be fatal. I think we now need to prepare, even if it means some political damage."
President Lee Jae-myung on the 23rd signaled his intent to strengthen property holding taxes and to revamp the capital gains tax exemption system for one household with one dwelling at the "national grand debate on real estate policy." The idea is to overhaul the tax burden structure, even at political cost, before the housing price bubble rebounds as a shock to the national economy.
But results differ across international comparison indicators that gauge the level of holding taxes, and some note that if the one-dwelling tax exemption benefit is limited by the number of times, it could discourage end users from moving up to different dwellings. Separately from the need for tax reform, they say the policy's effects and its impact on fundamental rights must be fully weighed.
◇ Lee: "To reach advanced-country levels, we need to triple holding taxes"
The president said, "Even to reach the typical level of advanced countries, we need to triple holding taxes," adding, "It would probably lead to a near-riot situation, but frankly it's something that should have been done in the past." He continued, "Even now we must prepare for what lies ahead," and, "We don't know which generation or who will be hit, but it will deliver a huge shock to Korea."
The argument is that if housing prices keep rising without increasing the burden of holding taxes, the real estate bubble could spread into an economy-wide risk. The president, however, proposed varying the burden not by uniformly raising holding taxes on all dwellings, but according to dwelling price, purpose of holding, and whether it is owner-occupied.
There is debate over the claim that holding taxes are one-third of those in advanced countries. An analysis by the Land and Liberty Research Institute of OECD data found Korea's effective holding tax rate was 0.15%, compared with the Organisation for Economic Co-operation and Development (OECD) average of 0.33%. The effective holding tax rate indicates how much holding tax is actually paid relative to the value of real estate assets. By this figure alone, Korea is closer to half the OECD average, not one-third.
Some also argue it is hard to make a simple comparison of tax burdens based on effective rates alone, because real estate prices, tax bases, and asset valuation methods differ by country. While holding taxes as a share of GDP are similar between Korea and the OECD average or slightly lower in Korea, holding taxes as a share of total taxes are higher in Korea.
Chung Sung-hoon, a professor in the Department of Real Estate Studies at Daegu Catholic University, said, "It is unreasonable to conclude that Korea's holding tax burden is one-third of advanced countries based solely on effective rates, which have different calculation standards by country."
◇ Even if holding taxes are strengthened, the effect on mid- to low-priced dwellings is uncertain
It is also uncertain how much strengthening holding taxes will curb housing price increases. While a greater holding burden could increase listings from high-priced dwellings and owners of multiple dwellings, it is hard to say whether that effect will spread to the mid- to low-priced dwelling market.
Song Seung-hyun, head of Urban and Economy, said, "Based on mid- to low-priced areas, strengthening holding taxes will not have a large effect in lowering housing prices." Kim Hyo-sun, chief real estate expert at KB Kookmin Bank, also said, "Because the comprehensive real estate tax burden grows as the prices of dwellings owned by multiple-dwelling owners rise, listings may emerge centered on ultra high-priced dwellings," adding, "Whether mid- to low-priced dwellings will also come to market is uncertain."
Experts point out that the relationship between holding taxes and housing prices varies depending on supply, interest rates, lending regulations, and demand for dwellings, so the need for increases should not be explained by a single indicator. They say a comprehensive design is needed that strengthens holding taxes while lowering transaction tax burdens so that listings can come to market smoothly.
◇ Limiting the number of one-dwelling tax exemptions: concern over discouraging moves
What sent bigger ripples through the market was a plan to limit the number of times the capital gains tax exemption for one household with one dwelling can be used. The president said, "There is merit to the criticism of giving the same benefit even if someone buys and sells high-priced dwellings multiple times," adding, "It seems problematic to grant an unlimited number of relief opportunities." He then asked policymakers to review options such as limiting the number of exemptions or gradually reducing the benefit after the first transaction.
Under current tax law, a household can receive a capital gains tax exemption if it owns one domestic dwelling for more than two years and meets related requirements. For dwellings located in regulated areas at the time of acquisition, a requirement to reside for more than two years can also apply. For dwellings with a transfer price exceeding 1.2 billion won, tax is imposed in proportion to the portion of gains exceeding 1.2 billion won. At present, the exemption can be received each time the requirements are met.
The Constitutional Court and the Supreme Court have judged that the purpose of the one-household, one-dwelling tax exemption system is to ensure stability in people's residential lives and to guarantee the freedom of residence and transfer. However, one cannot conclude that limiting the number of exemptions is immediately unconstitutional. This is because lawmakers are granted broad discretion in defining the targets and scope of tax relief.
If the number of exemptions is limited, more households may postpone moving or give up replacing their dwellings because of the tax burden. The impact could be especially large in Seoul, where there are many high-priced dwellings. According to Real Estate R114's tally as of the 12th of last month, among 1,468,824 apartment households in Seoul, 166,554 apartments priced over 3 billion won accounted for 11.3%. However, it has not been decided whether the government will limit exemptions only to high-priced dwellings, or where to set the threshold for high-priced dwellings.
Seo Jin-hyung, a professor in the Department of Real Estate Law and Administration at Kwangwoon University, said, "If capital gains relief is restricted excessively, it can limit the freedom of residence and transfer," adding, "Only when holding taxes are raised and capital gains taxes are lowered can the dwelling market shift from ownership-centered to use-centered."
Kim Seok-hwan, a professor at the Graduate School of Law at Kangwon National University, said, "Even constitutional freedoms can be limited for the public interest, but the question is how far to allow it," adding, "Considering the residential transfer of one-household, one-dwelling owners, it should be designed carefully to avoid excessive restrictions."