South Korea has scrapped a plan to shrink the comprehensive real estate tax deduction for owners of a single home they do not live in, but analysts say the market impact will be muted because the broader push to tax multiple-home owners and high-priced properties more heavily remains in place.
At a Cabinet meeting on the 1st, the government finalized a tax code amendment that keeps the basic deduction for non-resident single-home owners at the current 1.2 billion won in officially assessed value, rather than lowering it to 900 million won as originally proposed. The cap on year-on-year increases in the tax burden will also stay at the current 150%, instead of rising to 200% as planned. For married couples who jointly own a single home they do not occupy, the basic deduction was raised to 600 million won each from 400 million won. The ruling party is calling for the government to drop the distinction between resident and non-resident single-home owners altogether, and some observers say further changes could come during parliamentary review.
Experts expect the move to slow the wave of distressed listings driven by tax concerns that has been concentrated in high-end complexes in the Gangnam area. "Buyers already have limited funds because of lending curbs and high home prices, and the increase in properties being sold in a hurry for tax reasons had put downward pressure on prices in Gangnam. I think this measure makes it less likely that more such listings will pile up," said Ham Young-jin, head of the real estate research lab at Woori Bank. Ham added that "the market can read this as an easing signal, in that the push to tax non-resident single-home owners more heavily has partly retreated," and said the change is expected to steady the appetite among owners of expensive single homes to hold on to one prime property.
Still, the dominant view is that any relief felt by market participants will be limited, because the main pillars of tighter taxation remain: higher comprehensive real estate tax rates, deductions that vary by length of ownership and residence, and a new cap on the long-term holding deduction for capital gains tax along with stricter residency requirements. Market participants attribute the recent flood of listings at prices cut by hundreds of millions of won in high-end redevelopment complexes in Gangnam to capital gains tax concerns, including the new cap on the long-term holding deduction, rather than to holding taxes. The latest decision revises only some provisions on holding taxes and leaves capital gains tax rules untouched, making a significant shift unlikely.
"Sellers may delay putting homes on the market in hopes of further easing during the legislative process, but the opposite could also happen — some may move up their timing after concluding that little will change," said Nam Hyuk-woo, a researcher at Woori Bank's real estate research institute. "Some buyers may also be timing their purchases in anticipation of a real wave of distressed listings once the tax package is settled, so the standoff is likely to continue for a while." Lee Eun-hyung, a research fellow at the Korea Research Institute for Construction Policy, said the plan is "effectively identical to the earlier version apart from a few revisions, and the only difference is that it will now take longer than under the original plan to raise holding taxes sufficiently." He added that "with the policy direction of tighter taxation intact, neither the preference for holding one prime property within affordable limits nor the decline in rental housing supply is likely to change much."
