[VIEWPOINT]Higher taxes won’t lead to lower pricesThe participatory government under President Roh Moo-hyun has unfolded a variety of real estate policies, taking the stabilization of apartment prices in the affluent Gangnam area of Seoul, south of the Han River, as its primary task.
Some real estate experts have criticized the government’s policy on the grounds that it is not appropriate to make a price surge in a local area a target for policy intervention at the national level. Moreover, they point out that the effect of the policy is dubious as long as the fundamental cause of the problem ― the gap between the demand and the supply of housing in that area ― is not resolved.
The government’s response to such criticism is that an intervention through real estate policy is needed because real estate price hikes would spread to other areas if it the apartment prices in Gangnam are not controlled.
Although the government took a series of strong measures on the real estate market, including one on Oct. 29, 2003, a comprehensive real estate regulation announced on Aug. 31, 2005 and a conclusive real estate measure taken on March 30, 2006, there is no sign that Gangnam’s apartment prices are falling.
As an excuse, the government says more time is needed before we see the effect of its policies. The policy chief at the Blue House has even said that prices of housing units will plummet when a strengthened comprehensive real estate tax is imposed and that a “really damaging tax bomb” should be expected sooner rather than later. These comments notwithstanding, a recent government press release said prices of homes have not risen, except in “seven bubble areas” ― Gangnam, Seocho, Songpa, Mok-dong, Bundang, Yongin and Pyeongchon. Apparently, the government’s intention for the press release was to straighten out people’s perception that the prices of all housing units in South Korea have risen, as a result of exaggeration by the opposition and some civic organizations, and media reports about areas where housing prices have surged.
With this latest announcement, however, the government has admitted that its own policy has been a concoction.
The press release proved that the influence of Gangnam apartment price hikes has not spread widely, but was limited to a few particular areas.
In reality, the gaps between apartment prices in Gangnam and in other areas, and between the prices of small units and medium-sized to larger units, had widened.
Moreover, local housing markets in the provinces remained stagnant.
It is confusing to hear a chorus of high-ranking government officials express alarm over the possibility of a burst bubble almost at the same time that the press release was going out about the “seven bubble areas.”
Except in the “seven bubble areas,” there is no reason that housing prices in the other areas should plummet, because prices there have not been rising as sharply.
In that case, there can hardly be a problem in the real estate market if the prices of Gangnam apartments started to decline as a result of persistent government efforts. Surely the government does not mean it does not want Gangnam apartment prices to fall.
It is right to learn a lesson from the Japanese experience of the bursting of its real estate bubble, but we also have to recognize the differences in the circumstances of the two countries.
In the case of Japan, the scale of loans on real estate securities was much larger than that of South Korea, the mortgage rate was much higher and price hikes in real estate had spread to wider areas.
Furthermore, the decisive momentum for the sudden bubble burst in Japan was provided by a two-fold increase in interest rates in a year and the introduction of a ceiling on real estate-related loans.
Of concern for Koreans is that, although the government says it wants a soft landing for real estate prices, its policy does not seem to be headed in the same direction.
This is due to the government’s insistence on sticking to a wrongheaded method of lowering real estate prices by inducing housing sales through the imposition of high real estate taxes ― so high as to be called a “bomb” by the government itself ― and heavy capital gains tax on multiple-home owners.
I don’t have faith in the theory that stronger tax measures will stabilize real estate prices in the long run.
Even if such a policy succeeds, I think there will be a problem.
This is because such a policy will go against efforts to improve housing standards for the people.
In order to improve housing standards, various models of housing communities equipped with good educational environments and other social infrastructures should be developed and it should be possible for people to move to better housing through the free sales of homes.
The current tax system, however, forces a large number of single home owners into a dilemma.
On the pretext that home prices have increased, heavy property taxes are imposed, regardless of the income level of home owners.
Although the tax burden is so heavy, they can’t sell their homes easily, because the capital gains tax and the real estate transaction tax for the purchase of a new home are heavy, too.
It is even more difficult for elderly people who have no regular income.
This is the reason why I worry about the real estate tax system the president emphasizes will not change, even after a change of administration.
* The writer is a professor of economics at Sogang University. Translation by the JoongAng Daily staff.
by Kim Kyung-hwan