The Korea Herald

소아쌤

Koreans agonize over spiraling cost of rent

By 황장진

Published : Jan. 26, 2011 - 18:30

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Hong Jun-ho is busy preparing to move out of the home his family has lived in for the past two years in southern Seoul.

With the lease on his riverside apartment about to expire, the 34-year-old English teacher feels quite lucky to have found a new home in northern Seoul. It is affordable, located near his new school and also near his in-laws’ house.

But without such luck, he could have been in serious trouble:

As his lease drew to its end, his current landlord hiked the cost of his deposit too high.

“The landlord wanted a 60 million won ($54,000) increase from 220 million won in renewing the contract. It is outrageous,” said Hong, who will switch schools to one in central Seoul next month.

“The hike is more than a man’s annual salary. How could we save that much in just the two-year period (that we’d lived there), without getting loans from banks? Luckily, we found a place to move into but I still feel bad about what it could have been like if we hadn’t,” he added.

Hong might be among just a few lucky people these days in Seoul as many others are still struggling to choose between swallowing their landlord’s excessive demands or leaving for cheaper options in suburban or provincial areas.

Korea uses a unique home rental system called “jeonse,” under which a tenant can make a large lump-sum deposit for a residence in lieu of paying monthly rent. Landlords are allowed to use the deposit for alternative investments, which can sometimes yield better profits than collecting monthly rent if interest rates are high.

The rental system has served as a major way for low- and middle-income citizens to secure a place to live, especially because home ownership is out of reach due to high real estate prices driven by speculation.

Though property speculation has seemed to subside amid a protracted real estate slump, jeonse prices are now skyrocketing, affecting not just the livelihoods of many citizens but also shaking them at the core of their well-being: home sweet home.

According to a report compiled by Kookmin Bank that analyzed the nation’s housing price trends, the average lump sum that tenants paid jumped 7.1 percent last year, the highest annual increase in eight years.

The increase is just an average figure. In some cases in Seoul, tenants see their jeonse prices more than double in just two years.

Experts say that the soaring prices can be explained by the simple fact that demand outnumbers supply in the market.

“It seems that people remain reluctant to buy homes on fears that the real estate market may not have hit bottom yet,” said Park Eun-kyung, an economist at Meritz Securities Co.

“Instead they are seeking temporary residences until the uncertainties decline, driving up demand for jeonse and its cost along the way, while causing a slump in home purchase prices,” she said.

The government’s policy of denying purchases of cheaper, state-supplied apartments to homeowners is cited as another reason for increasing jeonse demand.

Record-low interest rates aggravated the problem as tenants tended to use bank loans to renew their residence contracts, while landlords tended to raise prices to offset losses stemming from low interest rates, experts noted.

The “jeonse crisis” prompted policymakers to take countermeasures as they worry that protracted rental price hikes could devastate the livelihood of working-class people, dampen consumption and eventually undercut the nation’s economic recovery.

On Jan. 13, the land ministry unveiled price stabilization measures that mainly focus on expanding the supply of small-sized housing units and offering low-interest rate loans for those seeking jeonse residences.

Experts remain cautious, saying the latest government measures will not be enough if they fail to assure that home prices will likely stabilize. And this will only lead to a rise in household debts as desperate tenants will turn to loans to keep their homes.

“If things do not turn around, people will end up turning to loans as a last resort,” said Kim Young-il, a research fellow at the state-run think tank the Korea Development Institute.

“Unfortunately, this will also be available for only a few people who have relatively high income levels and solid collateral.

Many others will be left with few options,” he added.

Household loans for jeonse have already spiked.

The Korea Housing Financing Corp. said that its jeonse loan guarantees amounted to 5.77 trillion won last year, up 23 percent from a year earlier. The figure was the highest ever since the housing guarantee agency was established in March 2004.

Experts say that if jeonse prices remain high for a protracted period of time, they could also have a negative impact on the nation’s fast but still fragile economic recovery.

That is because the type of residence mostly involes low- and middle-income people and they account for a large portion of domestic consumption.

“Turning to loans to stay in their homes will increase household debts in the process,” Lim Sang-soo, an economist at Hyundai Research Institute.

“With their debts growing, people might have to tighten their purse strings on other spending and this could eventually become a downside factor for the nation’s economic recovery,” he added.

He is not sure whether such unusually high jeonse prices will continue for a long period of time.

Instead, he said that the current situation might indicate there must be a perception change under way about houses in Korea, where investment in properties had been a sure bet for robust returns. He said that the age-old belief seems to be losing its ground.

“Houses had been regarded as objects for speculative investment on the belief that prices would surely rise in the end. That was a culprit for rising house prices, which in turn fostered more speculative investment,” Lim said.

“But as uncertainties continue over the outlook for the real estate market, belief seems to be gaining ground among people that the era of euphoria might be coming to an end,” he added. 

(Yonhap News)