Even Under Moon and Yoon Administrations, Transaction Cliff Persists... Interest Rates and Lending Curbs Play a Key Role [Capital Gains Tax Surcharge D-2]

Up to 30 Percentage Point Surcharge Under Moon Administration...
Transactions Halved


After Suspension of Surcharge Under Yoon Administration,
Interest Rate Hikes Led to a Drop of 1,000 Transactions Per Month

To forecast the market following the increased capital gains tax on owners of multiple properties, it is necessary to review past cases. The number of apartment transactions in Seoul fluctuated by more than double before and after the implementation of the capital gains tax surcharge on multiple homeowners during the Moon Jae-in administration.

This is because as the capital gains tax burden increases for high-priced homes, homeowners are more inclined to hold onto their properties rather than sell them. However, after the Yoon Suk-yeol administration took office and temporarily suspended the additional capital gains tax in an effort to reduce the tax burden, transactions did not revive; instead, they declined sharply. The impact of rising interest rates and tighter lending regulations had a far greater effect on buying sentiment than the capital gains tax.

A sign reading "Urgent Sale" is posted at a real estate agent's office in Songpa-gu, Seoul. Photo by Yonhap News.

According to an analysis of apartment sales transaction data from the Korea Real Estate Board as of May 8, the average monthly apartment transactions in Seoul for the year prior to the implementation of the increased capital gains tax in April 2018 stood at 10,687. Typically, when monthly transactions reach 10,000 in Seoul, the market is considered overheated, and this level persisted throughout the year. At the time, the government imposed an additional 10 to 20 percentage points to the capital gains tax rates for multiple homeowners in regulated areas, mainly targeting the overheated Gangnam district, in an effort to cool down the so-called "apartment frenzy."

Even in 2020, as housing prices surged, the government implemented a stronger measure in June 2021 by raising the short-term holding tax rate and increasing the surcharge rate for multiple homeowners by an additional 10 percentage points. Owners of three homes faced a maximum tax rate of 82.5% on capital gains, including local taxes. During the year prior to this increased capital gains tax, the average monthly transaction volume was 6,813, which marked a slight increase from the usual levels. According to the Ministry of Data and Statistics, as of 2022, there were 498,612 households in Seoul owning two or more properties, marking the lowest figure since statistics began in 2015.

In the year following the implementation of the surcharge, the average monthly housing transaction volume plummeted to 2,709—a reduction of more than half compared to the previous year. To further encourage multiple homeowners to sell, the government also raised the comprehensive real estate holding tax rate, with the tax assessment date set at June 1. For owners with multiple properties, who were already subject to taxation, the increased capital gains tax burden intensified the phenomenon of properties being locked up in the market.

In May 2022, President Yoon Suk-yeol was inaugurated and immediately implemented the suspension of the additional capital gains tax. This was both a campaign pledge and a promise made during the transition committee period, so the administration promptly revised the enforcement decree of the Income Tax Act to put the policy into effect. Only the basic tax rate was applied without the surcharge, yet apartment transactions further declined. From June 2022 for one year, the average monthly apartment transactions dropped to 1,736, about 1,000 fewer per month than before the policy change.

The market contracted to the point of a "transaction cliff," not simply a decrease in volume, largely due to surging interest rates, which sharply reduced buyer demand rather than the capital gains tax. Mortgage interest rates soared from the 3% range at the start of the year to 7–8% by year’s end. As the Bank of Korea responded to concerns of inflation driven by excessive liquidity during the COVID-19 period, it raised rates at an unprecedented pace, implementing two "big step" rate hikes (0.50 percentage points each) in a single year. Although the suspension of the capital gains tax surcharge led to an increase in available listings across Seoul, the lack of buyers resulted in a drop in transactions.

Experts believe that, given precedent, there will likely be some degree of "property lock-up" following this round of increased capital gains tax measures. However, they note that this could vary depending on economic conditions such as interest rates, as well as future government policies and market circumstances. Park Won-gap, Chief Real Estate Expert at KB Kookmin Bank, stated, "While a reduction in tax-saving listings will inevitably lead to fewer properties available, I do not expect a complete freeze in transactions. The government may announce preliminary plans or countermeasures to encourage property listings before introducing new tax amendments, and as policies can change, it is difficult to make a definitive judgment at this point."

Kim Eunsun, Head of the Big Data Lab at Zigbang, commented, "Given the concern about property lock-up, it is necessary to sequentially introduce policies to alleviate market uncertainty. Only if policies continue in a consistent direction can the prolonged 'holding' trend or the sense of urgency among buyers be eased."

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