The Economics of Controlling Home Prices: Heavy Taxes Raise Housing Costs

Many people have proposed heavier property holding taxes as a solution to real estate problems. The Roh Moo-hyun administration was no exception: it introduced the Comprehensive Real Estate Holding Tax and raised the tax base for housing, increasing the tax burden on homeowners.

Raising holding taxes can lower housing prices in the short term. However, it does not reduce consumers’ housing costs. In the long run, it reduces housing supply and instead increases the burden of housing costs.

Suppose there is a house with a market value of 300 million won. The reason this house can be worth 300 million won is that people are willing to spend 300 million won to buy it. Now suppose the government announces that it will levy a holding tax of 100 million won on this house one year later. Because the cost of owning the house rises by 100 million won (ignoring interest rates), the amount people are willing to spend to buy the house also falls from 300 million won to 200 million won. Accordingly, the market price of the house falls from 300 million won to 200 million won. This is the effect advocates of heavier taxation are aiming for.

The problem, however, does not end there. Although the market price of the house falls by 100 million won, the buyer must pay that amount to the government in taxes. Including the tax, the total amount that must ultimately be borne to own the house is 300 million won, just as it was when there was no tax. Heavier holding taxes merely transfer the value previously held by the existing homeowner to the government; they do not reduce the housing cost burden for homebuyers.

In the long run, heavier holding taxes actually increase the burden of housing costs. A house that would previously have sold even with a presale price of 300 million won can, after the tax increase, fetch only 200 million won, so naturally investment in homebuilding declines. As the supply of new housing decreases, upward pressure is placed on housing prices. Since the overall housing stock becomes relatively smaller, jeonse and monthly rent prices also rise. In the end, heavier holding taxes increase the burden of housing costs when taxes and housing prices are combined. That is why jeonse prices have risen since the August 31 measures.

Housing prices should be stabilized by increasing supply; heavier holding taxes are not an appropriate means of controlling housing prices. As in many advanced countries, real estate holding taxes should remain a means for basic local governments, such as district offices and county offices, to raise fiscal revenue.

Original title: [집값잡기의 경제학 ] 중과세, 주거비를 높인다

Author: Center for Free Enterprise (CFE)

Date: 2006-12-14

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=20&idx=10683