Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Korea's property market going nowhere
By Lee Min-hyung
Property tax hike crucial for market stabilization
By Lee Min-hyung
Korea's capital market has a very eccentric structure with a heavy reliance on the real estate.
People from all walks of life here are into real estate investments in Seoul. In contrast, equity markets are deemed “very risky” sources of investment here, which is not the case in most developed countries, such as the United States.
The perception, which has lasted for decades, does not appear likely to be shaken in the near future, as housing prices in Seoul and major satellite cities have skyrocketed in recent years despite the nation's prolonged economic slowdown.
From the perspective of the government, the nationwide boom of the real estate market is considered “evil” getting in the way of monetary liquidity in the capital market.
The Moon Jae-in administration, which took power in May 2017, has declared an “all-out war” against real estate speculation and demonstrated confidence that it could stabilize housing prices in the speculation-ridden capital area with strong regulations.
But the ambitious pledge ended up with a sharp rise in almost all apartment prices in Seoul. As the housing bubble is showing no signs of abating, the government is on track to introduce much tighter and broader regulations to normalize the market, in a move to divert the capital flow into more constructive sectors, such as the stock market.
But real estate experts here and abroad shared the same view that the current “regulations-cure-all” approach will not be able to calm the overheated market.
They urged the government to immediately drop its current approach, which has failed to generate outcomes for the past two years, and reform the real estate taxation system.
The experts urged the government to follow market logic and minimize regulations unless it wants further distortions in the market.
Reasonable tax system
Of note is the real estate tax system in the U.S. where the equity market is the major source of capital inflow from the private sector.
Experts argued that a shift in the real estate tax system here is crucial to change the “real estate-first” mindset of Korean investors.
Specifically, one noteworthy difference in the real estate markets between the two countries comes from property tax, they said.
“The U.S. government levies a considerable amount of property taxes, with those who purchase a house worth about 500 million won paying almost 5 million won, or 1 percent of the housing price annually, as a property tax,” Sung Choi, a real estate agent based in Oregon, the U.S., said in an email interview.
But under the same standard of comparison, the Korean government imposes only about 1.1 million won for the homeowner's annual property tax.
The expert called for the Korean government to raise the tax further, as this will pose a financial burden to potential buyers and drive down their appetite for investment in the housing market.
The Moon Jae-in administration, however, is seeking to introduce stronger and more diverse sets of regulations under the blind belief that they are the most effective means to curb soaring housing prices.
“A widespread perception in the U.S. is that purchasing multiple homes for investment is not easy due to the relatively high property tax,” he said.
Investors in the U.S. can generate stable sources of return by investing their capital in the equity market, but this is not the case in Korea, he said. This is because a number of U.S. firms offer stable dividend returns to investors on each month, quarter or year, according to Choi.
“But the Korean stock market is not as stable as that in the U.S., so most capital from private investors in Korea goes to the real estate market and has created this abnormal housing market,” he said.
“It is important for the Korean government to set a real estate policy in a longer-term perspective,” the expert said.
“In the U.S., it is natural for those who prepare for retirement to invest their capital in stocks guaranteeing stable returns, but Korean people never do so under the perception that stock investment is something that should be least desired,” he said.
Kwon Dae-jung, a professor of real estate studies at Myongji University, said controlling housing prices with regulations is a very risky idea, as this goes against the market logic of supply and demand. Also, few other countries intervene in the real estate market by introducing such multiple and specific regulatory packages, according to the expert.
“The U.S. government minimizes its intervention into the real estate market, and adopts flexible regulation by simply controlling loans from time to time,” he said. “The U.S. authority never introduces unnecessary and unreasonable regulations simply because there is a surge in housing prices in some specific areas.”
“Things are no different in other major developed nations,” he said. “It is hard to find countries seeking to control housing prices with regulatory measures like Korea.”
Some countries, such as Singapore, regulate the market, as they do not acknowledge private ownership in the housing market, but this is just an exception, he said.