This blog post calmly examines the connection between government policy and the real estate market through the structure of taxes levied throughout the entire process of buying, owning, and selling a home. It also outlines the logic by which taxes regulate the market.
Taxes are the final step in real estate
In a market economy, those who possess assets must bear the corresponding tax burden. This is because assets equate to power. Those with power inevitably carry commensurate responsibility. Real estate occupies a particularly significant position among such assets. Therefore, taxes are paid throughout the entire process: when purchasing an apartment, while holding it, and until it is sold.
Upon acquiring apartment ownership, the first tax paid is the ‘acquisition tax’. This tax is levied because the asset has been acquired. Additionally, to receive official recognition from the state as the owner of the asset, one must also bear the costs associated with the ‘registration’ process. While holding the apartment, one pays ‘holding taxes,’ which are broadly divided into property tax and the comprehensive real estate tax, often abbreviated as ‘CRT’. Finally, if one sells the apartment to another person and gains a profit, they pay ‘capital gains tax’.
One might complain about why there are so many taxes related to real estate. However, the purpose here is not to debate the fairness of these taxes, nor to explore tax-saving methods. How much tax one must pay during a real estate transaction and how to potentially reduce it should be individually verified when actually buying or selling an apartment. This blog post aims to examine how taxes influence the real estate market.
Real estate costs money just to own
When real estate transaction volumes drop excessively, the government considers various measures to stimulate activity. A common approach is to reduce cost burdens to encourage transactions, much like supermarkets attract customers with discount events. However, the government cannot forcibly lower apartment prices themselves. So what options does the government have?
“If buying a home is your New Year’s goal… what benefits are available?” (Newsis, 2022.12.31.)
Fortunately, among the policy tools the government can utilize, there are methods that produce effects similar to lowering apartment prices. These include reducing taxes, making it easier to obtain loans, or increasing the probability of winning a housing lottery. In fact, a system that temporarily reduced acquisition tax within a certain limit for first-time homebuyers has been operated, and similar forms of support policies have repeatedly appeared since then. Additionally, policy-backed financial products were launched, designed to allow relatively low-interest loans for purchasing homes below a certain price, regardless of income requirements. Concurrently, policies were implemented to increase the number of units allocated through lotteries, thereby expanding opportunities for newlyweds and young people with relatively lower subscription scores.
While policies are often announced one at a time, when the real estate market is particularly sluggish, there is a tendency for both targeted policies for specific groups and comprehensive policies covering the entire market to emerge simultaneously. Conversely, when the real estate market overheats, regulatory policies moving in the opposite direction are announced in succession.
“Reducing Multiple-Home Property Taxes and Easing Loans” (Asia Economy, December 30, 2022)
Let’s examine the tax issue for multiple homeowners. When the real estate market overheats, individuals owning multiple properties are often singled out as the core problem. This is because they are perceived to drive up housing prices through purchases for speculative purposes rather than actual residence. Faced with the need to cool the real estate market, the government introduces policies imposing relatively heavy taxes on multiple homeowners. This is called ‘heavy taxation’.
Conversely, when the real estate market becomes excessively depressed, the government chooses the opposite policy. At such times, terms like ‘relaxation’, ‘adjustment’, or ‘abolition’ frequently appear in news headlines. Indeed, during certain periods, the surtax applied to owners of two homes in designated adjustment areas was converted to the standard tax rate. For owners of three homes, the surtax was maintained but the tax rate was partially reduced. Furthermore, while mortgage loans for multiple-home owners were restricted in regulated areas, these restrictions were also eased within certain limits. Since then, this policy direction has been repeatedly adjusted according to economic conditions.
Why is the Comprehensive Real Estate Tax always in the news?
“Jointly-owned Couples and Seoul’s Two-Home Owners to See Largest Decrease in Comprehensive Real Estate Tax Next Year” (MBC, Dec. 25, 2022)
This time, let’s take a closer look at the ‘Comprehensive Real Estate Tax,’ the most frequently mentioned property holding tax in the news. The Comprehensive Real Estate Tax is a system designed to ensure tax equity by imposing relatively higher taxes on individuals holding high-value real estate. This naturally raises two questions: At what price level is real estate considered ‘high-value’? And why is this system regarded as a mechanism for tax equity?
First, let’s examine the second question. This issue is directly linked to the very basis for the Comprehensive Real Estate Tax’s existence. Since its implementation, the tax has been the subject of multiple constitutional challenges and legal disputes, yet it has consistently been upheld as constitutional. The underlying logic is that if one holds high-value homes or land within the limited resource pool of real estate, it is reasonable for them to bear a commensurate level of taxation. Furthermore, the Comprehensive Real Estate Tax also serves the policy objectives of stabilizing real estate prices and promoting balanced national development.
Now, let’s return to the first question. The threshold price ultimately depends on the government’s policy direction. At one point, the tax threshold was set at properties exceeding 600 million won in publicly announced price, or 900 million won for single-household, single-home owners. However, the threshold has since been raised. Recently, a system using 1.2 billion won as the threshold for single-homeowners has been applied, while maintaining a structure where deduction standards vary based on joint ownership status. Consequently, cases arise where couples jointly owning a home are exempted from the tax or see their burden significantly reduced. For dual-homeowners, the likelihood of reduced tax burdens has also increased as the threshold amount has risen and the surtax has been eased.
As long as the Comprehensive Real Estate Tax remains in place, it will inevitably continue to feature prominently in real estate-related news. Regardless of whether one is personally subject to this tax, simply observing whether the government is seeking to ease or tighten the tax provides insight into the overall direction of real estate policy. Furthermore, this can help gauge the future trajectory of the real estate market.
The business of renting out homes, apartment rental operators
The fundamental reason real estate issues repeatedly arise is the insufficient supply of affordable housing in desirable locations. Therefore, if stable housing can be secured without necessarily owning property, a significant portion of the problem could be alleviated. Even if someone owns multiple apartments, if they rent them out at reasonable prices to those without housing, it’s possible to expect that one person owning multiple homes won’t directly lead to rising housing prices. The ‘Apartment Rental Business Operator’ system was born from this very recognition. However, this system remains a prime example of one that failed to take root due to inconsistent policy implementation by the government.
“‘Unprecedented Tax Benefits’ Revive Apartment Rental Business Registration… But Will It Work?” (MoneyS, December 25, 2022)
The term ‘revival’ stands out in this article. It signifies bringing back a system that had once disappeared, while simultaneously raising questions about its effectiveness. The apartment rental business operator system grants certain tax benefits when multiple apartments are registered for rental purposes, treating them as housing supply rather than speculation. Key benefits include reduced comprehensive real estate holding taxes or capital gains taxes, and lower acquisition tax burdens.
This system was introduced during a period of rapid real estate market growth. However, it was later criticized for failing to achieve its goal of stabilizing housing prices, leading to reduced benefits and eventual abolition. As the real estate market entered a downturn and unsold inventory increased, the government revived and refined the system. While the basic structure remains similar to the past, certain conditions have been adjusted, such as including apartments below a certain size as eligible rental properties. Registering as a rental business operator to lease housing comes with conditions: tax benefits are offered in exchange for restrictions on rent increase rates and an obligation to maintain the rental for a specified period.
Government policy is undoubtedly important. However, for that policy to achieve its intended effect, the market must ultimately respond accordingly. While it would be ideal if the market resonated with the policy and moved voluntarily, reality has repeatedly shown that such cases are infrequent.
Even if you don’t own a home, you should still keep an eye on real estate news
When reading real estate-related articles, calmness and a cool head are paramount. If you react emotionally to the language used in the articles, you might become overly excited about issues that don’t actually directly concern you. This is especially true for articles about real estate taxes. After all, far more people are unaffected by real estate taxes than those significantly impacted by them.
That said, there’s no need to ignore real estate news and articles. Homeowners will naturally take an interest, and for those without property, few resources are as valuable as real estate articles for broadening one’s perspective on the world. It’s necessary to observe policy changes, see if housing prices stabilize and transaction volumes recover as the government intends, and examine how such changes impact the broader economy. This is a far more productive approach than debating whether ‘taxes are excessive’ or ‘the government is targeting asset holders too harshly’.
Whether you own a home or not, whether you are wealthy or not, our society’s interest in real estate is immense. As you mature, apartment prices naturally catch your eye, and you start pondering whether you should buy a home someday. Eventually, we come to realize the harsh reality that housing prices are excessively high, nodding in agreement with the notion of a real estate bubble. Most young adults starting their careers quickly grasp that even if they saved every penny of their current salary without spending a dime, purchasing a well-located apartment in Seoul remains nearly impossible.
It’s not just the younger generation facing hardship.
Middle-aged and older people who worked hard for years to finally buy a home also feel dissatisfied, as they perceive surrounding property values rising while their own home’s value stagnates. Adding the government’s tax burden only amplifies this discontent. Though their circumstances differ, the conclusion reached across generations is similar: “This world is broken, and the government failing to fix it is the problem.”
The undeniable reality is that the prices of well-located apartments in Seoul have reached levels that are extremely difficult for ordinary citizens to afford. It is also hard to deny that if real estate prices fluctuate drastically, the entire Korean economy would suffer a major blow. Housing prices are not only problematic when they skyrocket; they also cause serious side effects when they plummet. If the value people believed to be a solid asset collapses in an instant, the national economy inevitably plunges into significant turmoil.
South Korea’s real estate problem is not just an issue for homeowners. It is deeply intertwined with the financial sector through real estate loans, closely connected to non-homeowners through the jeonse deposit system, and linked to numerous industries including construction, finance, and services. Therefore, a collapse of the real estate market could lead to a crisis affecting the entire industrial sector, not just a specific class. This means a sharp drop in housing prices is not necessarily something to celebrate.
Even if current real estate prices feel abnormal, bringing them down overnight is not desirable. An approach is needed that regulates the pace within what our economy can bear and gradually normalizes the market. The reason taxes are positioned at both the beginning and end of real estate transactions is precisely because, within this process of adjustment, taxes function as the most direct and powerful policy tool.
