Announcement Effects: Taxation of Housing Capital Gains in Seoul

In early August 2005, a subset of investors in 14 of the 25 districts of Seoul were paying taxes on housing capital gains based on increases in market values since purchase, but in the other 11 districts the gains were based on increases in assessed values. Because market values exceeded assessed values, investors in the latter districts were paying a lower effective tax rate. On August 31, the South Korean government announced that as of the start of 2007 investors in these 11 districts would also be taxed on market value gains. But, in fact, the taxation at market value became the rule in all districts prior to 2007. We test for whether the announcement and the subsequent acceleration of the higher taxation had impacts on house prices, using both a spatial equilibrium model and a three-factor vector autoregression model. We find that the acceleration lowered house prices by about 10 %.