South Korea’s coastal city, Busan, finds itself in the midst of an evolving crisis within its real estate market. A blend of an economic slowdown, coupled with a forthcoming wave of newly constructed apartments, is contributing to a significant decrease in property prices, thereby destabilizing the housing landscape. The manifestation of this turbulence is witnessed in the phenomena of “Reverse Jeonse” and “Busted Jeonse”, which are causing concerns given their potential socio-economic ramifications.
At the core of this crisis is the Jeonse system, a unique and traditional housing lease structure utilized widely across South Korea. Unlike the conventional rental systems seen globally, where tenants pay monthly rent, the Jeonse system operates differently. Tenants offer landlords a lump-sum deposit, generally equivalent to between 50% to 80% of the property’s market value. This deposit is returned without interest at the end of the lease, giving landlords the ability to utilize and invest the deposit during the lease period. This system has been a significant part of South Korean housing culture for decades and continues to play a vital role.
“Busted Jeonse scandal” is a real estate fraud case that occurred in South Korea in 2022. In this case, a number of landlords and real estate agents conspired to defraud tenants who were renting apartments using the jeonse system. The jeonse system is a common form of rental payment in South Korea, in which the tenant pays a lump sum of money to the landlord as a security deposit. In the Busted Jeonse scandal, the landlords and real estate agents used this system to their advantage by collecting large sums of money from tenants and then failing to return the money when the tenants moved out. In some cases, the landlords even went so far as to sell the apartments that the tenants were renting without their knowledge or consent. As a result of this scandal, many tenants were left without a place to live and without their security deposits.
However, recent times have seen a distressing rise in “Busted Jeonse” situations, primarily driven by declining property prices. Landlords, unable to sell their properties or secure sufficient funds to make up for the decreased values, are struggling to return the large deposits to their tenants at the end of the lease. This occurrence not only poses a significant financial risk for tenants who depend on the return of their Jeonse deposit but also highlights the financial strain faced by landlords in a weakened real estate market.
Parallelly, “Reverse Jeonse”, another concern, is witnessing an upward trend. This refers to a peculiar situation where the Jeonse price (deposit) surpasses the actual sales price of the property, a direct result of plummeting property prices. An oversupply of apartments, causing a decrease in sales prices, coupled with relatively stable Jeonse prices due to the long-term nature of Jeonse contracts, contributes to this phenomenon.
Specifically, in Busan, these issues have become notably pronounced. Thousands of new apartments are expected to enter the market in the latter half of this year, contributing to a sharp drop in both rental and sales prices. Properties that initially promised to fetch substantial amounts on the Jeonse market are now experiencing significant devaluations, causing considerable unease amongst potential landlords and real estate investors.
The simultaneous expiration of numerous Jeonse contracts and the surge of new apartments onto the market results in a mismatch between supply and demand. The excess supply and limited demand are applying downward pressure on property prices, which intensifies the issues of busted and reverse Jeonse.
Complicating matters further, the influx of “Busted Jeonse” and “Reverse Jeonse” is expected to worsen the situation in the second half of the year. The added apartment supply might exacerbate the existing mismatch in supply and demand, thereby leading to an even steeper decline in property prices and increasing the instances of “Busted Jeonse” and “Reverse Jeonse”.
This protracted slump in the Busan property market could potentially have broad social and economic implications. Individuals looking to buy or sell properties could be significantly impacted, as well as those looking to secure a comfortable place to live under the Jeonse system. It also poses a stark challenge for policymakers who need to balance protecting tenants, maintaining a stable housing market, and fostering economic growth in the region.
This crisis offers an instructive insight into the fragile dynamics of the Jeonse system and the domino effect it can have on the wider economy and society when property prices decline. It’s an ongoing reminder of the need for constant monitoring, strategic foresight, and a balanced approach to mitigate potential risks in real estate markets.
Looking ahead, 2023 will be a crucial year for the real estate market in Busan, and indeed, the Jeonse system as a whole. As the city grapples with the ongoing challenges, it will be paramount to closely watch how these issues unfold and the measures taken to address them, which could have long-term implications for the broader South Korean real estate market.
