The government has decided to lower the tax rates on home purchases indefinitely to stimulate the depressed housing market. In principle, the decision is a step in the right direction; it will boost housing transactions to some degree by alleviating the tax burden on home buyers.
But the problem is that home acquisition taxes account for a large portion of the tax income of local governments. Any cut in the tax rates would translate into a reduction in provincial governments’ tax revenues.
Officials of the related ministries said they would promote reform of the current local tax system to compensate for the expected drop in local governments’ tax revenue. They added they would come up with a reform bill by the end of August to present to the National Assembly in September.
Quite expectedly, their statement triggered a vehement outcry from provincial governments. They lambasted the ministries for announcing the tax cut plan without any consultation with them. They noted that imposing and collecting home acquisition taxes constituted one of their core functions.
More importantly, they are worried that the planned scheme could result in a further drop in their tax revenue at a time when tax income is falling short of the target due to the prolonged economic slowdown.
Local governments’ concerns are justified. But at the same time, lowering home acquisition taxes is necessary as it is the most effective measure available to the central government in trying to revitalize the housing market.
Worryingly, housing prices continue to fall as people hold off buying a home in anticipation of a further drop in prices. As a result, rental costs keep rising. According to reports, in some regions, “jeonse” prices ― the fully-refunded, lump-sum deposits that tenants pay upfront in rental contracts ― have risen to the level of home sale prices.
If housing prices are left to fall further, it will not only depress domestic demand but increase systemic risks by threatening the stability of financial companies that have extended a large amount of mortgages.
So shoring up the home market has become one of the most urgent economic tasks facing the nation. At the moment, the only way to stabilize the housing market is to reactivate housing transactions.
The central government now needs to speed up the legislative process as the housing market will remain frozen until the tax cuts take effect. To avoid a plunge in housing transactions during the period, it is necessary to apply the tax reductions retroactively.
