The South Korean government has just introduced new macro-prudential measures to control its housing market.
Like Australia, South Korea uses macro-pru to try and address systemic housing risks without adjusting benchmark interest rates.
Research from Citi shows that South Korean regulators have focused on an “overheated speculative zone”, comprised of the capital Seoul (all 25 districts) and two other areas — Gwacheon and Sejong City.
For those areas, they’ve reintroduced a measure which would be sure to go down like a lead balloon in Australia — increased capital gains tax (CGT) on property investors.
The tax increases initially ran from 2005 before being eased back in 2014, but the government has now re-introduced to measures “to protect end-user demand of ‘ordinary people’”, Citi said.
In the designated areas, investors who own two houses will be hit with an extra 10% in capital gains tax upon the sale of a property. Three-house owners can expect an extra 20% tax.
That’s in addition to baseline CGT of between 6-40%, depending on the size of the gain and the holding period.
From January 2018, there will also be a “hike transfer tax” of 50% for investors who re-sell an apartment purchased off the plan, regardless of the holding period.
For properties in the zone, the government will also impose stronger minimum requirements for loan-to-value ratios and debt-to-income ratios.
Citi said there will also be “stronger regulation on redevelopment and reconstruction projects by prohibiting additional acquisition or sale of landowner’s right
Regulators will also require a compulsory report of funding plan and occupancy plan for prospective home buyers.
Citi expects that the new measures will lead to a moderation in construction investment, following strong growth between 2012 and 2016.
“In our view, the measures will mitigate financial imbalance risks of which the Bank of Korea (BoK) has been concerned, thus providing more room for BoK to keep its policy rate longer” Citi said.
This chart shows the timeline since 2000 of how South Korean house prices have reacted to various attempts by the government to address systemic housing risks: