"Tuning the 'Republic of Apartments': Non-Apartment Supply and Tax Policy Targeting Ultra-High-Value Homes [Real Estate AtoZ]"

Jeonse Prices in Greater Seoul Rise by 0.71%
Monthly Rents Hit Highest Level Ever Recorded

Short-Term Supply Focuses on Non-Apartment Housing
Construction Regulations Eased, Financial Support Expanded

If 150% Tax Burden Cap Remains,
Tax Hike Effects Will Materialize in 2028

Amid ongoing instabilities in the jeonse and monthly rental markets and a continued rise in housing prices, the government's real estate policy discussions are shifting toward restoring the supply of non-apartment housing and reforming tax policies for owners of ultra-high-value single homes. In terms of tax policy, there have been calls to increase the effective tax rate on ultra-high-value homes at recent real estate forums; however, due to the current 150% tax burden cap, a substantive tax increase is expected to materialize in earnest only after the general election, around the end of 2028.

Jeonse Supply Shrinks, Monthly Rents Soar

The Bank of Korea raised its benchmark interest rate on the 16th for the first time in three years and six months, causing tension in the real estate market. With the announcement of a tax reform plan including increases in property-related taxes such as holding tax imminent, the rate hike is expected to act as a negative factor in the housing sales market. Photo by Yonhap News Agency, taken on the 16th at a real estate agency in Songpa-gu, Seoul.

According to the July edition of the 'KB Housing Market Review' recently published by KB Financial Group Management Research Institute on July 19, last month, jeonse prices for homes in the greater Seoul area rose by 0.71% compared to the previous month. This marks the largest monthly increase since November 2021. The jeonse supply-demand index stood at 173.4, continuing its rise for the fourteenth consecutive month. An index reading above 100 indicates that supply is insufficient relative to demand, according to survey responses.

Won Gab Park, Chief Real Estate Expert at KB Kookmin Bank, analyzed, "The rise in jeonse prices is driven more by shortages in supply than by price movements," adding, "More attention should be paid to the volatility from disappearing listings on the ground than to lagging market prices."

As the supply of jeonse contracts dwindles, tenants are being pushed into the monthly rental market; the index tracking monthly rent prices for apartments in the greater Seoul area hit its highest level since the survey began in January 2016.

The recent interest rate hike has compounded the burden of loan interest for borrowers. On July 16, the Bank of Korea raised the base rate from 2.5% to 2.75% per annum, an increase of 0.25 percentage points, marking its first rate hike in three years and six months since January 2023. The possibility of another increase in August is being discussed in the securities industry. If rates continue to rise, mid- to lower-priced regions, where a larger proportion of buyers rely on loans, could be more heavily impacted than high-priced areas, where cash transactions dominate.

Government Focuses on Non-Apartment Supply and Tax Policy

Amid increasing housing instability, both the government and academia are discussing ways to expand the supply of non-apartment housing and reform tax policy. In May, the Ministry of Land, Infrastructure and Transport announced plans to ease construction regulations on urban-type housing—which is classified as non-apartment housing—and to expand support for new construction financing. At a recent public discussion on expanding housing supply organized by the Ministry, restoring the supply of non-apartment housing was the first issue addressed.

A representative from the Ministry explained, "Korea is called the 'Republic of Apartments' because housing is overwhelmingly concentrated in apartments, making it difficult to expect rental market stability without restoring non-apartment supply."

At a tax policy forum organized by the Ministry of Economy and Finance, the idea of switching from taxation based on the number of properties to a new system based on market value and the period of actual residency was discussed. Experts proposed setting the threshold for ultra-high-value housing at around KRW 3.5 to 4 billion and increasing the effective tax rate for these properties.

During a Cabinet meeting on July 14, President Lee Jaemyung also questioned whether it was reasonable to offer the same tax reduction to a KRW 10 billion primary residence as to an average single home, highlighting the need to strengthen the holding tax for ultra-high-value single homes.

Tax Increase Effects to Materialize After Election...150% Cap Is a Key Variable

However, even if the effective tax rate for owners of ultra-high-value single homes is raised substantially, the impact of actual tax increases is expected to be felt in earnest only from 2028 onward, due to the current 150% tax burden cap.

The tax burden cap functions as a kind of ceiling, limiting how much property and comprehensive real estate taxes can increase year-on-year. If the cap is 150%, only up to 1.5 times the previous year's amount can be charged; if the cap is 300%, the ceiling is three times the amount. Notably, the comparison is not based on the actual taxes paid the previous year, but rather on a recalculation using that year's officially assessed value and the previous year’s tax rules.

In other words, in the first year when the government raises tax rates, the baseline is set according to the old rates. As a result, a significant portion of the increased tax calculated under the new rate gets cut by the cap. However, starting the following year, the baseline is updated to reflect the new rate, at which point the full effect of the tax increase is reflected. If the cap is left unchanged, close to half of the tax hike’s effect is diluted in the first year.

During the previous Moon Jae-in administration, the government raised the maximum comprehensive real estate tax rate for multiple homeowners to 6% and, including local tax, raised the capital gains tax rate to as much as 82.5%, also moving the tax burden cap for two-home owners in regulated areas up from 200% to 300%. This was done to achieve effective results from the first year of the tax increase. The subsequent Yoon Suk Yeol administration later standardized the cap at 150%.

Even if the current administration raises the taxable threshold to KRW 3.5–4 billion for ultra-high-value homes and substantially increases the effective tax rate, maintaining the current 150% cap will limit the policy’s effect in the first year of reform, 2027. For instance, even if the recalculated tax liability jumps to KRW 30 million, a homeowner who paid KRW 10 million the previous year would only need to pay KRW 15 million; the remaining KRW 15 million would be cut by the cap.

The deferred increase will then be reflected on the December 2028 tax bill, following the 23rd general election. In 2028, the cap calculation will be based not on the actual payment of KRW 15 million, but the originally assessed KRW 30 million, and the ceiling will rise to KRW 45 million, so the full KRW 30 million increase is imposed without deduction. As a result, the substantive effect of the policy changes will materialize only after the general election.

President Lee will preside over a public forum on July 23 to discuss overall real estate policy, incorporating opinions gathered from supply, financing, and tax policy discussions held by the Ministry of Land, Infrastructure and Transport, the Financial Services Commission, and the Ministry of Economy and Finance since July 14.

The government aims to announce the final tax reform plan reflecting these discussions as early as the end of this month. On KBS Sunday Diagnosis, Blue House policy chief Kim Yongbeom said, "We will decide the appropriate price level and criteria (for ultra-high-value housing) after gathering more public input through forums, and these standards will be included in the tax law amendments to be announced at the end of this month."

This content was produced with the assistance of AI translation services.