[Weekly Review] Electricity Rates Frozen in Q1 Next Year... Producer Prices See Largest Increase in 13 Years

Government Announces '2022 Economic Policy Directions'... Rent Increase Within 5% Recognized as 1 Year of Actual Residence
Real Estate Financial Vulnerability at Record High

[Image source=Yonhap News]

[Sejong=Asia Economy Reporter Kwon Haeyoung] The government will significantly ease the capital gains tax exemption requirements for landlords who raise rent by no more than 5% to stabilize jeonse and monthly rent prices. In line with the public price increase suppression policy, electricity rates for the first quarter of next year will be frozen. Due to the rise in international oil prices and raw material costs, last month’s domestic producer price index rose at the largest rate in 13 years.

◆Cooperative landlords, 'capital gains tax exemption' residency requirement reduced from 2 years to 1 year＝ On the 20th, the government announced the '2022 Economic Policy Direction' at the Blue House with President Moon Jae-in in attendance. The main goal is to tighten control over the stability of the everyday economy, including jeonse and monthly rent prices and inflation.

First, cooperative landlords who maintain a lease contract for 2 years will be recognized as having fulfilled 1 year of the 2-year residency requirement to qualify for the capital gains tax exemption special case. However, this is a temporary special case, applicable only to new or renewed contracts signed between December 20 this year and December 31 next year, and only for single-household single-homeowners with homes valued at 900 million KRW or less at the start of the lease.

Cooperative landlords refer to those who raise rent by no more than 5% compared to the previous contract at the time of new or renewed contracts. Here, 'previous contract' is limited to cases where an existing lease contract exists and has been maintained for at least 1 year and 6 months. Newly signed lease contracts after purchasing a home or lease contracts inherited at the time of home purchase are excluded.

Along with this, as cases of converting jeonse to banjeonse (deposit + monthly rent) have increased recently in new lease contracts, the government will temporarily raise the monthly rent tax credit rate in 2022 to reduce tenants’ monthly rent burden. According to current law (Article 95-2 of the Restriction of Special Taxation Act), the monthly rent tax credit benefit is given to non-homeowners with total annual income of 70 million KRW or less who meet the housing requirements of national housing size (85㎡) or less or a standard market price of 300 million KRW or less. The credit rate is 12% for those with total income of 55 million KRW or less and 10% for those exceeding 55 million KRW, but these will be raised to 12% and 15%, respectively.

◆Electricity rates frozen again in the first quarter of next year＝ Korea Electric Power Corporation (KEPCO) announced on the 20th that it will apply a final fuel cost adjustment rate of 0 KRW per kWh for January to March next year. This means maintaining the same level as the fourth quarter of this year.

Earlier, KEPCO calculated the fuel cost adjustment rate for the first quarter of next year as 29.1 KRW per kWh through the 'fuel cost linkage system,' which reflects fuel cost increases or decreases in electricity rates quarterly. According to KEPCO, during the fuel cost reflection period for the first quarter of next year (September to November), the price of thermal coal was 181.81 KRW per kg after tax, up 20.3% compared to the previous 3 months. Liquefied natural gas (LNG) was 832.43 KRW per kg, and BC oil was 661.27 KRW per kg, rising 38.4% and 15.1%, respectively. This is 61.6% higher than the average fuel cost over the past year.

KEPCO submitted a proposal to the government to raise electricity rates applying a quarterly adjustment limit of 3 KRW per kWh, which is one-tenth of the adjustment rate, but the government exercised its veto power and decided to freeze the rates. The government explained the freeze by saying, "Although adjustment factors arose due to the sharp rise in international fuel prices, it is necessary to ensure the stability of people’s lives amid the prolonged COVID-19 pandemic and high inflation rates."

As a result, despite the fuel cost surge starting early this year, KEPCO was unable to raise electricity rates by even 1 KRW this year. Not reflecting the fuel cost increase in electricity rates is expected to further increase KEPCO’s financial burden, which is already carrying debt worth 142 trillion KRW.

◆Producer price index rises at the largest rate in 13 years＝ The Bank of Korea announced on the 21st that the November producer price index was 112.99 (2015 base 100), up 9.6% from a year earlier. The increase was the largest in 13 years and 1 month since October 2008 (10.8%). The producer price index has maintained record highs for eight consecutive months since April. Compared to the previous month, it rose 0.5%. The sharp rise in producer prices was largely influenced by the increase in international oil and raw material prices.

Looking at the rate of change by item, manufactured goods rose 0.5%. Among manufactured goods, coal and petroleum products (3.8%) had the highest increase, followed by primary metal products and chemical products, which rose 0.9% and 0.7%, respectively. Prices in the electricity, gas, water, and waste sectors also rose 1.8%. On the other hand, computers, electronics, and optical equipment fell 0.2%. Specific items that rose compared to a month ago include diesel (3.1%), gasoline (6.2%), plastic pipes (17.3%), ferroalloys (19.5%), and napa cabbage (53.5%).

◆Real estate financial vulnerability at 'all-time high'... risk of asset price adjustment expands＝ The real estate financial vulnerability index, which indicates the gap between real estate prices and income, has reached a critical level. This is the result of a particularly severe concentration of funds into real estate amid private debt of households and companies soaring to 3,343 trillion KRW, 2.2 times the gross domestic product (GDP), in the third quarter.

According to the 'December 2021 Financial Stability Report' released by the Bank of Korea on the 23rd, the real estate financial vulnerability index (FVI) was 100, the highest since statistics began in 1996. The index sets the highest value at 100 and the lowest at 0 to show how high asset prices are relative to the real economy, meaning the gap with income has widened to the maximum. According to the Bank of Korea, the index was only 82.1 in the first quarter of last year, rose to 90 in the third quarter, and has continued to rise in the first, second, and third quarters of this year.

The real estate sector index is calculated considering the ratio of housing prices to income, housing price growth rate, and rent growth rate for medium and large commercial properties. This means all real estate, including housing and commercial properties, has peaked. A Bank of Korea official explained, "If housing prices rise sharply compared to income, the probability of an economic recession due to real estate-related debt increases."

The Bank of Korea expects that if internal and external shocks such as base interest rate hikes occur, the scale of household loan defaults could approach 10 trillion KRW.

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