'Punitive tax, removal of tax incentives for landlords, corporate bodies in store'

Ruling Democratic Party of Korea (DPK) floor leader Kim Tae-nyeon / Yonhap

Desperate gov't, ruling party flounder over property tax scheme

By Lee Kyung-min

Little to no desired outcome is expected from the government and ruling party's desperate push for “far stronger” measures to stem property speculation, as they refuse to acknowledge shortcomings of their repeatedly failed measures that ignored market principles and public expectations.

Ruling Democratic Party of Korea (DPK) floor leader Kim Tae-nyeon said Monday a “punitive tax” on frequent home traders will be in store coupled with removal of tax incentives long granted to landlords and corporate bodies, in what he said will be “the strongest move yet” to uproot speculation in the real estate market.

The push is highly likely to be realized given the DPK-majority National Assembly can easily pass the revision in July at the earliest possible date, enacting a slew of pending bills seeking heavier tax on owners of expensive and multiple homes.

Yet the “frantic” attempts to control what should be ruled by supply and demand will continue to jack up home prices as a reaction to anxiety-driven panic buying and ensure further distortion of the market already experiencing liquidity overflow amid a record-low borrowing rate.

According to the Bank of Korea (BOK), M2 in April stood at about 3.18 quadrillion won ($2.5 trillion), the highest amount to date. A measure of money supply, M2 includes less liquidity encompassing very liquid M1 such as cash and checkable deposits.

Doubling down?

The revision, the 23rd round of measures implemented under the Moon Jae-in administration, seeks to impose a heavier tax on gains made after frequent housing transactions within a period of a year or two. Specifics will be announced as early as this week.

Also to be tightened are lending and tax regulations on landlords and corporate bodies owning homes, a frequently used tax avoidance scheme by owners of expensive home that exploits the legal “loophole” under which corporations are exempt from heavy taxes.

Data from the Ministry of Land, Infrastructure and Transport showed the number of landlords spiked to 523,000 in May, up from 440,000 in June 2019. This was a further increase from 330,000 in June 2018. The number of homes rented also jumped to 1.59 million in May 2020, up from 1.15 million in June 2018.

Similarly, corporate entities in the rental property business soared to 3.3 million in 2019 from 2.3 million in 2017. Apartments bought by them this year between January and May from 5.2 percent of the total, up 1 percent from the first five months of 2017.

A finer-tuned effort will be undertaken to tighten lending rules to prevent “gap investments,” a popular investment strategy using Korea's unique jeonse system whereby a tenant pays a refundable lump-sum deposit instead of monthly rent. An investor with a home rented to a jeonse tenant can buy another home as long as the individual can come up with the difference between the market price of a purchased home and the jeonse deposit to be paid by the tenant. Many investors draw the difference from banks, encouraged by the record-low borrowing rate.

Yet the measures will be of little help if the new policy fails to factor that heavier tax on landlords will mean higher jeonse deposits, an immense burden on tenants for whom not meeting the higher asking figure leads to eviction.

According to Citizens' Coalition for Economic Justice (CCEJ), a left-leaning civic group, the median price of apartments in Seoul soared by 314 million won, or 52 percent, over the past three years, double from 134 million won during the term of President Park Geun-hye between 2013 and 2017. The price dropped 15 million won from 2013 to 2008 during the term of Park's predecessor Lee Myung-bak.

The increase of value in homeowners' assets stemming from apartment price hikes led to 493 trillion won in gains during the Moon administration, more than triple the 155 trillion won gained during the Park administration.