Taxes alone won't fix Korea's housing market

The government is putting the finishing touches on its tax reform package ahead of its release in early August. At the center of the proposal is a revision of the comprehensive real estate tax that would shift the basis of taxation from the number of homes owned to their total value, while imposing heavier burdens on owners of ultraexpensive properties.

The government argues that the changes will reduce demand for the so-called one premium home and improve tax fairness. Yet policies centered on suppressing demand through heavier taxation are more likely to create new distortions than stabilize housing prices. Korea has already witnessed such unintended consequences under previous administrations, including that of former President Moon Jae-in. Since the current administration tightened taxes and mortgage regulations, rising home prices have spread beyond Seoul's Han River corridor into northern Seoul and neighboring Gyeonggi.

The government should also proceed cautiously with reported plans to reduce the long-term capital gains tax deduction while introducing a three-tier comprehensive real estate tax. Such an approach runs counter to sound tax principles. Increasing both holding taxes and transaction taxes discourages homeowners from selling, reducing housing supply and weakening market activity.

The more immediate priority is addressing the growing "loan cliff."

At Maegyo Station Prugio Palucid in Suwon, Gyeonggi, the 50 billion won ($34.3 million) allocation for final mortgage loans was exhausted in just three minutes on Friday. Financial regulators responded only after President Lee Jae Myung instructed officials to review complaints raised during the previous day's national housing policy forum. Even so, banks remain reluctant to expand lending because they fear penalties for exceeding government lending quotas.

It is difficult to regard the current situation as normal when even prospective homeowners preparing to move into completed apartments cannot secure the financing needed to pay their final balance, despite the president's acknowledgment that the system requires improvement.

Public opinion reflects that growing frustration. A recent Gallup Korea survey showed President Lee's approval rating falling back to 51 percent, its lowest level in a month, with dissatisfaction over housing policy cited as a major factor.

Restoring stability to the housing market requires more than higher taxes. If holding taxes increase, transaction taxes should be eased to encourage normal market activity and maintain a balanced tax system. Genuine homebuyers also need practical financial measures, including transitional arrangements for final mortgage loans. At the same time, the government should accelerate housing supply through redevelopment and reconstruction projects.

Only when tax policy, financial regulation and housing supply work together can Korea achieve lasting stability in its real estate market.

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