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Real estate cooling measures could change buying pattern

July 10,2018
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After the government announced last week its intention to raise the real estate tax, the trend in the real estate market is likely to shift - with some people choosing against owning several homes to one “smarter choice,” according to experts.

A 59-square-meter (635 square feet) unit in the Mapo Raemian Prugio in Ahyeon-dong, Mapo distict, was recently sold for 1.02 billion won ($916,592). At the end of last year, its price was around 800 million won, which means it jumped by 20 percent in just six months. The construction of the complex was completed in September 2014. The prices of some other units in the complex rose by as much as 400 million won.

“It’s still a relatively new apartment and brand value is also highly recognized,” explained a local real estate agent. “Even when the real estate market saw a brief downturn in April, the demand for this complex didn’t diminish.”

Experts say that this trend will spread throughout the market.

A similar trend was witnessed more than 10 years ago when the Roh Moo-hyun administration put pressure on the owners of multiple apartments in an attempt to cool down the real estate market.

Akin to the current Moon Jae-in administration, the Roh government jacked up the capital gains tax, making it less profitable for speculators to buy and sell.

While the Moon government’s intention is the same as the Roh government’s, measures by the Moon administration are seen as more draconian.

After the government implemented a measure to increase the capital gains tax in April, levying heavier taxes on multiple-property owners, it also announced last week its plan to push up the comprehensive real estate tax.

In the plan, the Moon government clearly differentiated the amount of tax hike on single home owners and multiple home owners, which was not the case in the tax reform by the Roh government.

With the reform, a person who owns more than three apartments will see a 0.3-percentage-point increase in his or her comprehensive real estate tax starting next year, an addition to the 20-percentage-point hike they experienced in the capital gains tax earlier this year.

“Even if the level of price increase is similar, a single-property owner would end up with bigger profit since his or her tax will be much less,” said Park Won-gap, a senior real estate analyst from KB Kookmin Bank. “Demand for landmark properties [referring to the more well-known apartment complexes whose prices are used as barometers to analyze the real estate values in their respective regions] will go up.”

But this doesn’t necessarily mean owning one apartment would suddenly become the better choice than owning a few.

The government plan revealed last week also showed that the tax burden for a pricier home will go up as well, even if it is the only apartment owned.

According to the new plan, the comprehensive real estate tax rate of an apartment will increase as well from 0.1 percentage point to 0.5 percentage points.

An apartment is subject to this tax when its government-assessed value exceeds 900 million won.

The average value per 3.3 square meters of the apartments in Seoul is 28 million won, which means the government-listed value of a unit goes beyond 900 million won when it is bigger than 165 square meters.

Analysts predict that apartments in the so-called Gangbuk regions, north of the river, will become more popular among potential investors than the ones in the affluent Gangnam area — referring to Gangnam, Seocho and Songpa districts.

“Apartment complexes reconstructed in the Gangnam region face restrictions in trading, not to mention that many of them are expensive enough to be subject to the comprehensive tax,” explained Kim Eun-jin, the head of the research team at Budongsan 114, a real estate information provider.

“Demand for speculation will move north of the river where reconstruction projects are not restricted by regulations and taxes.”

But there are some concerns of unintended side effects.

Heo Yun-kyung, a research fellow at the Construction Economy Research Institute of Korea, explained that real estate demand will be concentrated on certain complexes guaranteed reconstruction, or ones in just the right price range to avoid the comprehensive tax.


BY AHN JANG-WON, HWANG EUI-YOUNG AND CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]