Housing Market Responses to the Reinforcement of Real Estate Tax

In this paper, I investigate whether there is an actual decline in real estate prices as a result of tax capitalization following the introduction of the comprehensive real estate holding tax (hereafter,CREHT) in Korea. The Participatory Administration formulated CREHT as a venue to stabilize soaring property prices regardless of the resistance from various parties. Despite the controversy over the policy, to the best of my knowledge, there has been no empirical study on whether CREHT actually achieved its purpose. This essay originated from this research question and presents empirical evidence on housing price declines caused by tax capitalization following the four stages of the CREHT legislation：preliminary announcement of legislation, announcement of early adoption, enactment, and reinforcement. With the introduction of the CREHT system, real estate prices are likely to drop by the present value of the expected CREHT expenses. This is the effect of tax capitalization. I find that apartment prices in the Seoul metropolitan area decline significantly after the announcement of CREHT's early adoption and reinforcement. These results offer supportive evidence on the effect of tax capitalization on housing prices. The economic consequence of CREHT is noticeable from the empirical results. Apartment prices in Seoul metropolitan area dropped 0.43% in the four－week period immediately following the announcement of the early adoption of CREHT, and 0.07% in the four－week period after its reinforcement.