South Korea Offers Tax Breaks to Revive Flagging Home Sales

South Korea will give tax breaks to home buyers and cut borrowing costs as the government seeks to revive home sales that tumbled to the lowest level since 2006, threatening a rebound in Asia’s fourth-largest economy.

First-time home-buyers with annual income less than 60 million won ($53,900) will be exempted this year from taxes on property purchases worth no more than 10 times their salary, according to a government statement. Multiple-home owners will see rules relaxed on capital-gains taxes.

The measures, which require parliamentary approval, are aimed at reversing a housing slump that Land Minister Suh Seoung Hwan says has gone on for too long. South Korea’s government last week cut its growth forecast to 2.3 percent this year from December’s 3 percent, and said they’ll unveil a supplementary budget soon.

“The government did pretty much everything they can to deregulate and make it easy for home transactions to increase,” said Jean Lim, an economist at Korea Institute of Finance. “Sales will go up in the short-term.”

Transactions fell 14 percent to 47,288 in February, the least for that month in seven years, according to the land ministry. Prices are also sliding, with values in Seoul lower than any time since March 2008. January’s total of 27,070 home transactions was the second-lowest for any month dating back to 2006, when the data was first released, land ministry data show.

Higher Income

While Asian neighbors wrestle with housing costs propelled by higher incomes and inflows of capital, in South Korea a household-debt binge is constraining mortgage borrowing. Household credit climbed to a record 959.4 trillion won at the end of last year.

Other measures announced today including a move to lower borrowing costs on state-supported loans to between 3.3 percent and 3.5 percent, down from 3.8 percent. The government will help refinance debt for some people facing credit default.

“A stagnant property market may be an increasing risk to the economy, financial markets and the low-income earners if such a downturn continues,” Suh said in Seoul today. “We will help spur the recovery through tax and financial support, while deregulating some of the rules imposed earlier.”

Ruling and opposition lawmakers have agreed to reinstate a home-purchase tax cut, according to their e-mailed statement on March 17. Still, the Financial Services Commission is not considering easing debt-to-income and loan-to-value restrictions on mortgage borrowing, chairman nominee Shin Je Yoon said in parliament on March 18.

Prices Slipped

Residential house prices slipped 0.5 percent in February from a year earlier, the biggest decline since September 2009, according to data from Kookmin Bank. Prices fell 0.1 percent in February from January, an eighth straight monthly drop and the longest losing streak since 2005, even after the Bank of Korea cut benchmark borrowing costs twice last year.

“My top policy priority is a quick normalization of the property market,” Suh, the land minister, said in his inaugural speech on March 12. “Effective policy measures are in urgent need.”