A Robin Hood real estate policy being pushed

In its campaign to cut speculative investment in real estate while protecting homeowners, the government has established a rough guideline for distinguishing between the two: 900 million won ($773,000). Those with properties worth that or more are considered punters. Those with properties below that level are seen as legitimate end users.

Owners of more than one apartment are also in the former category.

Seoul Mayor Park Won-soon supports the general sentiment and is going a step further. He wants to create a fund in which to place proceeds from the taxation of real estate transactions. That fund would be used to buy buildings for the government to lease out.

“Today’s regressive real estate phenomenon is the result of past Lee Myung-bak and Park Geun-hye governments that encouraged people to buy homes even by taking out loans,” Mayor Park said during a real estate discussion held at the National Assembly on Dec. 17, the day after the government’s latest real estate measures were announced. “We need to have a fundamental solution, such as tripling the comprehensive real estate taxes so that speculative investments have no footing.”

The Seoul mayor argued that the government should, through taxation, collect unearned income made from real estate as well as profits generated from such development and transfer it to benefit the general public.

Curbing housing prices

The Seoul mayor was concerned about the government’s decision to raise the assessed values on housing, including the comprehensive tax.

“It needs to be cautious not to increase the tax burden of owners of relatively lower-value housing units in Gangbuk [District] or to affect the health insurance of retired seniors,” Park said. Insurance premiums are pegged to asset values.

Seoul National University economics Professor Lee Joon-koo said that only few of the homeowners are affected by the tougher tax burden.

“This year only 590,000 apartment owners were subject to the comprehensive real estate taxes,” Lee said. “That means 97.5 percent of the population has nothing to do with it.”

The comprehensive real estate tax, which was first introduced in 2005 under the Roh Moo-hyun administration, is a national tax levied on high-end apartments.

For single homeowners, they are taxed when the housing unit that they own exceeds 900 million won in assessed value. When owning more than one unit, they are taxed when the combined property value exceeds 600 million won.

“The image that the comprehensive real estate tax is a bad tax policy that is throwing bombs at the middle class is fake news created by conservative news outlets,” Lee said.

A recent Gallup poll commissioned by the Seoul city government just before the estate measures last week found that 71.7 percent of Seoulites were in favor of raising the tax burden on those owning two or more apartment.

“In 2016, the real estate unearned income including profits made from sales as well as from rent amounted to 374.6 trillion won, which is equivalent to 22.9 percent of the country’s GDP,” said Lee Tae-gyung, researcher at the Institute of Land and Liberty. “And because of the astronomical size of such unearned income, speculative investment has become rampant.”

Experts say housing prices in the short term will likely cool as intended by the government, which is levying heavier taxes on high-end apartment owners as well as multiple home owners while winning the support of the rest.

“For the time being, the market will see an adjustment,” said Kwon Dae-jung, Myongji University professor on real estate.

But whether housing prices will stabilize in the long term is uncertain.

Real estate experts say the recent rise in real estate prices increased values by 1,000 trillion won, and those in their 30s have rushed to buy apartments before the prices go up further.

According to the Korea Appraisal Board, there were 1,889 apartments sold in Seoul in January. Of those apartments, 25 percent were bought by those in their 30s.

That ratio hit 30 percent in August and 32 percent in September. In October, it was 31 percent.

The apartments that were popular among people in their 30s were those that have elementary schools within the complex, are close to subway stations and have a basement parking lot connected to an elevator.

Budongsan 114’s Kim Eun-jin said the latest government measure did not include plans to supply apartments meeting these criteria and thus failed to resolve the anxiety of homebuyers.

Floating capital

Some of the market experts say housing prices resulting from the lack of apartment supply could resurface.

“The restriction on mortgages is a policy that only allows cash-rich people to buy apartments in Seoul,” said Kim Hak-ryeol, head of The Rich Consulting Group. “There’s a possibility that the Seoul real estate market polarization will widen further as the middle-class entry will become that much more difficult.”

Experts say the problem is the massive liquidity in the market and the lack of investment targets because of the strict real estate regulation.

Investors are unlikely to stash their money in bank deposits, as interest rates are low, while the Korean stock market has shown little movement.

Koreans have traditionally been heavier investors in real estate compared to other countries.

While 80 percent of Korea’s fortunes are tied up in real estate, only 35 percent of the personal wealth of Americans is in real estate. Even in Japan, that ratio is only 45 percent.

When it comes to the financial investments of Koreans, only 40 percent is in deposits, 30 percent in insurance and 5 percent in stocks and bonds.

Experts advise Koreans, especially young people, to diversify their investment portfolios, as buying an apartment in Seoul is nearly impossible.

“If you own an apartment, it means you’re investing in won,” said Hong Choon-wook, head of EAR Research. “There’s a need to hedge volatility by diversifying investments to include foreign currency deposits, such as dollars, overseas stocks and bonds and real estate investment trusts.”

Hong says that one way to invest is to buy U.S. real estate and Treasuries.

BY KIM CHANG-WOO AND KIM HONG-JOON [lee.hojeong@joongang.co.kr]