South Korea rolls out toughest rules yet to cool housing, hikes capital gains tax

By Cynthia Kim

SEOUL (Reuters) - South Korea will raise capital gains taxes on owners of multiple homes and impose fresh mortgage curbs to rein in speculators who policymakers blame for stoking a housing bubble in main regions across the nation.

The latest measures - the third set of steps in 10 months - are the most stringent on record and signal government worries that rampant household debt could imperil the economy if left unchecked.

Starting from April 2018, those with two homes in the designated regions will face 10 percentage point of additional capital gains tax, on top of the current tax rates ranging from 6 percent to 40 percent depending on the size of profits, the government said in a statement on Wednesday.

Those with more than three homes will face an additional 20 percentage point tax on top of the existing levy.

The proposed changes in capital gains tax need to be approved by lawmakers.

Wednesday's measures also designate all of Seoul and parts of the outskirts of the capital as 'overheating zones,' which will be subject to tighter mortgage rules.

"By far this is the strongest measure to curb buying frenzy," said Lee Mi-yun, an analyst at Real Estate 114 Inc., a real estate research agency.

"Those with multiple homes are likely to stay in wait-and-see mode, as the proposed changes needs to go through the parliamentary hurdle."

Mortgage rules that came into effect July 3 and other restrictions in November last year have failed to stabilize prices. The July measures saw loan limits tightened for home buyers in regions showing signs of overheating, including Seoul.

Locally listed construction company shares showed muted reaction to announcement as many had fallen steadily in the past few days in anticipation of the tighter rules.

The sub-index for construction-related companies declined 3.2 percent since July 26. GS construction is off 7.7 percent since last Tuesday.

DEBT RISKS

Household debt is currently at a record high, a headwind for growth as it crimps private consumption and potentially exposes the economy to a sharp down turn in the event of a housing market collapse.

Regulators are also concerned speculators could drive up property prices beyond the reach of first-home buyers and those in low-income category.

"Residential properties shouldn't be investment products but a home, and any speculative demand should be curbed," the government said in the statement.

The average price of a Seoul apartment in March exceeded 600 million won ($534,616.41) for the first time, an increase of more than 20 percent from four years earlier.

Despite the tighter mortgage curbs in July, apartment prices in Seoul rose 4.81 percent from a year earlier in July, while prices nationwide increased 1.6 percent, data from Koomin Bank shows.

Wednesday's announcement will see loan limits for home buyers in Seoul and its outskirts tightened to 40 percent of a property's value, down from 60 percent.

Debt repayments will also be limited to 40 percent of home buyers' annual income in those selected regions, down from the current 50 percent, it said.

Within Seoul, those investing in the affluent Gangnam district as well as Mapo, and Yongsan will face even tougher mortgage rules and resale restrictions.

Details on when the fresh mortgage rules will kick in will be decided before year-end, the government said. Unlike the proposed changes in capital gains taxes, the new mortgage rules don't need parliamentary approval.

"Measures announced today could slow home buying for now," Lee said.

($1 = 1,122.3000 won)

(Reporting by Cynthia Kim; Additional reporting by Dahee Kim; Editing by Shri Navaratnam)