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[EDITORIALS]Stop the bubble bursting

Published: 28 May. 2006, 20:59

Starting next month, real estate transactions must be registered according to the real market prices. If any price manipulation is discovered, those involved will have to pay up to three times the original acquisition tax required by law. The problem is that real estate taxes will also rise along with this stricter regulation.
Once the registered amount is heightened from the current 60-80 percent level to 100 percent, it will lead to higher acquisition and registration taxes. As a result, real estate purchasers will have to pay more tax, despite the same tax rates.
Although it is perfectly natural to require people to pay tax according to the actual transaction price, it is easier said than done when you consider the additional tax that will be levied. For properties that have undergone a significant price rise, the acquisition and registration tax will be several times higher than before. So even if homeowners put properties on the market, it is unlikely a deal will take place because of the tax burden for potential buyers. Thus, real estate transactions will be at a complete standstill.
The government announced that it had lowered real estate-related tax rates from 3.8 percent to 2.7 percent when it raised the land possession tax last year. But the cuts will either be canceled out or might cause purchasers to pay more than they would before. This especially applies to areas north of the Han River, as areas like the Gangnam area have already been writing down actual trading prices on their register as a result of being designated “watch areas.” The government’s assertion of having lowered tax for the transfer of real estate is complete nonsense when you look at these facts.
If the policies continue, real estate deals will be hit with a triad of taxes, increased possession tax, capital gains tax and additional transaction costs. No matter how important stabilizing real estate prices may be, it is excessive for the government to stage an offensive of taxes.
It was the government itself that promised it would provide a way out by strengthening the possession tax while lowering the transaction tax. But it is again the government that has blocked that road with a severe bombardment of taxes.
In order to prevent the popping of the “real estate bubble” as the current administration insists, it must drastically lower transaction costs so that deals can take place. Lowering of the capital gains tax rates, which is basically considered a transaction tax, will further enhance the effects.