Government Considers Tax Reforms Amid Concerns in Rental Market

The government is poised to propose reforms to property and capital gains taxes next month, prompting heightened attention from the market. Concerns are growing that renewed liquidity from the booming semiconductor industry and rising stock prices could flow back into the real estate sector. The government aims to adjust the tax system to focus on genuine demand. However, there are fears that increasing tax burdens could further destabilize the already strained rental market.

According to government sources on June 22, officials are considering measures to adjust property tax burdens through changes to the fair market value ratio. This includes revising the tax base for comprehensive real estate tax, increasing tax burdens on high-value homes, and reducing long-term holding exemptions for non-resident homeowners. The primary goal is to protect actual residents while reducing tax benefits for investment properties.

Earlier, Kim Yong-beom, head of the Presidential Office's Policy Office, stated on Facebook on June 20 that “it is necessary and desirable to rationally adjust property and capital gains taxes.” He cautioned that there is a risk of abundant liquidity returning to the real estate market in the second half of the year, noting that “this time, it is likely that those with cash, rather than those borrowing, will be active.”

Market signals support the government's concerns. According to the Korea Real Estate Agency, apartment prices in Dongtan, Hwaseong, rose by 2.22% in the third week of June, marking the highest increase nationwide. The cumulative increase this year stands at 9.57%, the highest in the country. In Yongin's Suji District, known for its proximity to Samsung Electronics and SK Hynix facilities, prices have also surged by around 9% this year, particularly in the so-called 'semiconductor belt.'

However, there are doubts about whether the proposed tax reforms will achieve their intended effects amid the worsening supply-demand imbalance in the rental market. The Korea Real Estate Agency reported that the rental supply index for apartments in Seoul reached 122.5 in the second week of June, the highest level since February 2021, when rental shortages were severe following the implementation of the Lease 2 Act. The decline in new rental units and a reduction in available rental listings have led many existing tenants to delay moving.

Critics argue that increasing tax burdens could exacerbate instability in the rental market. If both property and capital gains taxes rise, landlords may choose to hold onto their properties rather than list them for sale, or they may pass the increased tax burden onto tenants through higher rents. Some analysts suggest that reforming long-term holding exemptions for non-resident homeowners could encourage more listings, but this would only be feasible if sufficient supply conditions are met, according to experts.

Kim In-man, head of the Real Estate Economic Research Institute, stated, “While the government may consider tax increases to stabilize housing prices, addressing the supply instability in the rental market should take precedence. It is advisable to expand the supply base before discussing tax reforms.”

Nam Hyuk-woo, from Woori Bank's Real Estate Research Institute, noted, “The current rental market is in a structurally weak supply state due to decreased new rental units, the conversion of rentals to monthly leases, and a reduction in rental business supply. In this situation, if tax reforms further dampen private rental supply conditions, the decrease in rental listings could worsen.” He added, “To stabilize the rental market, it is essential to expand public supply while also improving tax and regulatory frameworks to encourage private supply in non-apartment markets such as villas and officetels.”