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‘Jeonse’ system loses favor with landlords

Apartment buildings under construction in Seoul. (Bloomberg)
Apartment buildings under construction in Seoul. (Bloomberg)
Ahn Ji-eun, 34, lives in a two-bedroom flat in Hwagok-dong in western Seoul with her husband and twin daughters.

She moved into the 70-square-meter unit (about 22-pyeong) a year ago as a tenant on a one-year contract and now she is desperate to renew it.

“We are told to top up our key money by 30 percent or move out. I’ve been looking for new places to stick to the current deposit level but it has been tough,” Ahn said.

Ahn has no plans to buy a home. She has seen drastic price drops in Seoul and the surrounding Gyeonggi Province in the past year, dealing a blow to those who bought homes on expectations of a property boom in years to come. She would rather go back to pay monthly rent ― “wolse” in Korean ― than be chained to decade-long mortgage payments from buying a property on debt.

“But taking the option of wolse would be my last one because our spending will increase when kids start their schooling and it just isn’t sustainable,” Ahn said.

The Ahn family is one of the many Korean households living in rented homes to be hit by recent steep prices of “jeonse,” the uniquely Korean way of leasing property based on lump-sum deposits.

Real estate experts attribute the rising jeonse prices to a change in landlords’ preference to wolse. They say that low interest rates have caused landlords to favor monthly payments instead of lump sums that they can deposit in banks.

Under the jeonse system, a deposit guarantees a resident right to use the property for a year or two without paying rent. Jeonse tenants usually pay 30-80 percent of the market price of the property as key money for their tenancy and claim it back at the end of the contract.

The system dates back to Joseon Dynasty and was practiced in the Seoul area for those who migrated into the capital from the provinces.

Jeonse has been a popular housing option among low-income households. Because their tenancy right is protected by the local government upon registration, the jeonse system has been the safest and most popular housing option in the local lease market for decades.

But more people are now being forced to pay monthly rent instead.

A study by the Hyundai Research Institute in April showed the portion of tenants living on monthly rent doubled over the past 16 years, driven by low interest rates, falling home prices and the growing number of single-person households.

It said residents on wolse now make up 44.8 percent of the country’s lease market, up from 23.3 percent in 1995.

The jeonse system has been sustainable for two main reasons ― the country had enjoyed an almost century-long rise in property prices and high benchmark interest rates. These allowed homeowners to make a profit from jeonse contracts through the interest from the key money and the rise in value of the property.

Economists say jeonse properties will continue to decrease under the low interest rate policy and the sluggish housing market.

“(The) jeonse shortage will continue for the next few decades because homeowners really no longer have a reason to keep fat deposits when interest rates are so low,” said Kim Dong-yul, chief economist at HRI.

The benchmark interest rate fell from 26.4 percent in 1965 to below 5 percent level since 2000. The figure has remained below 3 percent since the global financial crisis of 2008-9, which pushed homeowners to either sell off their properties or collect monthly rent.

According to Budongsan No. 1, a property market research agent, the number of jeonse properties halved over the past four years as owners turned their properties to wolse. It said there are 81,952 apartments in Seoul requiring 100 million won ($93,558) or less of jeonse deposit, down 48.6 percent from 2007 level of 168,670.

“It’s a totally different situation from a couple of years ago. Jeonse prices are so much higher because owners are raising them to compensate for the shrinking interest rate market,” an agent employee said.

Demographic changes are also raising demand for wolse. More people are choosing to live alone, meaning a smaller proportion of households are able to afford the key money required to buy a home or lease one on jeonse.

According to the Seoul Metropolitan Government, almost one in four households in Seoul is now a single-person household. The figure jumped from 4.5 percent in 1980 to 23.8 percent in 2010, posting over tenfold increase.

“The trend toward wolse is inevitable. The government needs to do something more drastic to ease rent burdens,” Kim said.

The government rolled out a package of measures to shore up the housing market four times this year alone, but the industry is experiencing a prolonged downturn with transaction freeze. They include halving of acquisition tax from 2 to 1 percent for homes valued at 900 million won and below and slashing loan rate from 4.5 percent to 4 percent for households with an annual income of 30 million won or less.

By Cynthia J. Kim (cynthiak@heraldcorp.com)
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