Koreans view real estate as a must-have item as they feel that housing is necessary for a secure future. While many American families keep their wealth in financial assets, such as stocks or shares, real estate accounts for more than 80% of Korean household wealth.
The Korean rental system varies from western rental systems in several ways. Two main kinds of the Korean rental system are Jeonse and Wolse.
Most people around the world can choose to rent or purchase a home, but Korea has a third option: “Jeonse,” a system that lies between monthly rent (“Wolse”) and ownership.
Jeonse is a unique leasing system found solely in Korea. The tenancy begins with a single security deposit of 50% to 80% of the property’s current market value. This one-of-a-kind renting model dates back to when interest rates were high because the deposit’s interest return doesn’t go to the tenant, but the landlord can keep it as revenue. With Jeonse’s contract, there is no additional monthly rent to pay. The landlord must return the deposit in full upon its contract expiration. Under the law, “Jeonse” is a two-year contract with the option to renew for another two years.
The “Jeonse” system emerged from Korea’s lack of mortgage lending, soaring property prices, and a demand for private finance. “Jeonse” served as a private banking solution to an overheated housing market, allowing landlords and renters to reap the benefits of a lease arrangement. This private lease financing fueled Korea’s economic expansion from the 1960s through the 1990s.
The “Jeonse” system goes through boom-and-bust cycles, typically dependent on supply and demand. Following the financial crisis of 2007-2008, the Korean central bank cut interest rates from 5% to 2%, discouraging landlords from depositing the lump sum deposit into savings accounts. House owners proper monthly rental contracts in reaction to low-interest rates in banks, resulting in a dramatic price increase in “Jeonse” leases as they became less frequent.
However, as of November, seven in ten Koreans with mortgage loans saw their interest burden rise from the previous year due to a sharp increase in interest rates. Moreover, landlords in Korea have had difficulty finding new tenants since the number of apartments available for “Jeonse” has tripled, causing prices to fall. Homeowners aren’t the only ones predicting a drop in housing values. Some economists foresee a significant fall.
Inflation has been a critical element of the economy in recent months. In the October 2022 report, the Consumer Price Index (CPI), a prominent indicator of inflation, was up 7.7% year on year. Mortgage rates are hiked substantially higher than the previous year in response to rising inflation. Higher mortgage rates may signal that buyers can’t afford as high a sales price.
Compared to last year, the number of residential homes whose ownership changed owing to a forced sale by auction increased dramatically this year. According to the Supreme Court, the number of apartments, villas, and residential office buildings whose ownership moved due to forced auction stood at 4,805 instances in the first ten months of this year, a 25.3 percent increase over the previous year.
A forced sale by auction occurs due to a lawsuit filed by creditors when landlords fail to fulfill a debt. There are several occasions when the current “Jeonse” pricing is lower than it was two years ago. As a result, the number of cases in which tenants compel such auctions to collect their “Jeonse” deposits is likely to increase.
Deposit for Jeonse is theoretically a debt owed by landlords to renters, although both sides tend to ignore this, with the former having more bargaining power. Landlords in Korea have rented out houses through the Jeonse system for different reasons. When homebuyers do not have enough money to purchase properties for investment purposes, they usually rent out their homes. The deposit for Jeonse is an interest-free loan that is frequently rather large. Some people utilize the Jeonse system to relocate to a new area, while others, primarily multi-homeowners, seek to earn interest on their deposits.
The Jeonse market has frozen in several months as the Bank of Korea increased its base rate from a record-low 0.5 percent last year to the current 3.25 percent, in line with the rise in US rates. Most property loans in Korea are floating rates. It means that repayments climb in step with the base rate. Landlords are also having difficulty finding buyers due to stricter loan regulations.
Furthermore, concerns about the ‘Reverse Jeonse issue,’ which refers to a situation in which a landlord cannot refund a tenant’s rent deposit even after the contract period has expired, are rising as Jeonse demand falls and Jeonse prices continue to plummet. Korean landlords may experience money troubles if Jeonse deposit rates fall fast.