The ways people in their 20s and 30s in Seoul are financing home purchases are changing rapidly. The share of money they have saved themselves is shrinking, while reliance on external funds such as gifts from parents or private loans is growing. There is criticism that the tax principle of “tax where there is income” is failing to function properly in the face of intergenerational wealth transfers.

An analysis by the Kyunghyang Shinmun of the ‘Source of Funds Plans (excluding foreigners·corporations)’ submitted by the Ministry of Land, Infrastructure and Transport to the office of Rep. Cha Gyu-geun of the Cho Kuk Innovation Party on the 8th found that, among people in their 20s who bought homes in Seoul for owner-occupation, the share of self-funding (deposits·stock·bond sales) in total purchase amounts fell from 29.6% in the first quarter of last year to 27.1% in the first quarter of this year. In April~May this year, the latest data compiled so far, it dropped to 24.9%.

By contrast, the share of external funds combining gifts·inheritances and other borrowings rose over the same period from 15.1% to 22.9%, and in April~May this year it reached 23.6%. The gap between self-funding and external funds narrowed from 14.5 percentage points in the first quarter of last year to 1.3 percentage points in April~May this year. In effect, the shares of self-funding and external funds have become similar.

People in their 30s showed a similar pattern. The share of self-funding rose from 17.1% in the first quarter of last year to 19.9% in the first quarter of this year, and to 22.0% in April~May this year. However, over the same period the increase in external funds was faster at 9.1%, 15.7%, and 17.3%. As a result, the gap between the two narrowed from 8.0 percentage points in the first quarter of last year to 4.7 percentage points in April~May this year.

The growing share of external funds stems from an increase in borrowing between individuals. The share of ‘other borrowings’, meaning person-to-person transactions, in total purchase amounts for people in their 20s nearly doubled from 5.2% in the first quarter of last year to 10.2% in the first quarter of this year, and rose to 11.0% in April~May this year. For people in their 30s, it increased from 3.1% to 6.8% over the same period, and reached 7.7% in April~May this year.

Under current tax law, even when borrowing money from parents, if a promissory note is drawn up applying the statutory interest rate (annual 4.6%) and interest is actually paid, no gift tax is due. Of course, the National Tax Service deems it a de facto gift if the annual interest burden exceeds what the child can reasonably bear. However, because it is not easy for the National Tax Service to check ex post facto whether interest was paid in the multitude of private monetary transactions, the possibility of gifts via loopholes has been raised consistently.

The share of funds from gifts·inheritances also increased. For people in their 20s, that share relative to total purchase amounts rose from 9.9% in the first quarter of last year to 12.6% in both the first quarter and April~May of this year. For people in their 30s, it climbed from 6.0% to 8.9% in the first quarter of this year and to 9.7% in April~May.

The composition of self-funding also changed. For people in their 20s, the share from their own deposits fell from 23.5% in the first quarter of last year to 21.5% in the first quarter of this year, and to 15.3% in April~May this year. For people in their 30s, it edged down from 14.4% to 14.3% over the same period, and to 13.5%.

By contrast, the share of funds raised by disposing of stocks·bonds grew. For people in their 20s, it dipped slightly from 6.1% in the first quarter of last year to 5.6% in the first quarter of this year, but jumped to 9.7% in April~May. For people in their 30s, it steadily increased from 2.7% to 5.6% and 8.5%.

Hong Jeong-hoon, senior researcher at the Urban Research Institute, said, “The structure in which young people’s home purchases depend more on parental asset transfers than on earned income is becoming increasingly evident” and “If this trend leads to an easing of gift taxes, the phenomenon of the parental generation’s asset gaps being passed down to their children’s generation could intensify further.”