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Korea braces for ‘jeonse’ crunch

Paradigm shift to monthly rent imminent but painful for middle class

Seoul office worker Jasmine HS Kim and her husband are contemplating what to do when their apartment lease expires at the end of this year.

Their owner has already notified them through a real estate agent that she is considering shifting to billing monthly rents, and would no longer accept large-sum deposits, or “jeonse.”

This has prompted them to start looking for available and affordable jeonse apartments in Seoul, but Kim said there are not many choices in the market. Apartment prices are too high, as are jeonse prices, and they are unwilling to pay monthly rent as that would further eat into their income, leaving them less to save.

They are also reluctant to take out another loan just to finance their living expenses as that would increase their financial burden, even though an increased loan extension seems to be the only government policy that can directly benefit them for now.

As they run out of options amid the emerging jeonse crunch, Kim said the current circumstances are compelling them to “reach out to their parents for a little help.”

The ongoing paradigm shift in the housing market, where the number of jeonse apartments is decreasing and that of monthly rental homes increasing rapidly, is making the young generation and the middle class, including Kim, uneasy.

Jeonse, a unique system that offers a “win-win” opportunity to both the owners and tenants, is losing its luster in this age of low interest rates and a rapidly aging society.

Owners were able to use the jeonse funds to further leverage for the purchase of another apartment, or deposit them at banks that offered stable, double-digit returns in years past.

Tenants, on the other hand, were able to buy time by saving some of their wages while living in jeonse apartments, in the hopes of buying a house in the future with their savings, recoverable jeonse deposit and very few loans.

However, this win-win system is losing appeal with domestic economic research centers such as Woori Finance Research Institute projecting that Korea’s jeonse will gradually be phased out and replaced with monthly rents.

Transactions of monthly rental apartments reached a record high, accounting for nearly 40 percent of total jeonse and monthly rents in the first seven months of this year, compared with 34 percent a year ago, according to the Ministry of Land, Infrastructure and Transport.

Korea’s rapidly aging society and global financial uncertainty are making owners shift to the monthly rent payments to provide them with a stable income, especially as their reliance on post-retirement state pension declines.

With apartment prices already high, fueled by speculation and leverage over the past years, the young generation cannot afford to buy apartments but seek jeonse amid tightened spending and slow wage growth, leading to an increase in the prices of jeonse homes.

Simply put, too many people are chasing after too few jeonse homes.

These socioeconomic factors are attributable to the weakening purchasing transactions, which have not fully recovered even after the government introduced its housing stimulus measures last April, analysts said.

Transactions in the Seoul metropolitan area improved in May and June after the April announcement, but dropped in June and July, data by the Land Ministry further showed.

This indicates that the effects of the stimulus policy introduced in April that included tax cuts on capital gains and property acquisitions were short-lived, prompting political circles and the government to devise follow-up measures.

However, it remains to be seen whether such policies could boost demand for apartments, given that social issues and the problem of the looming apartment price bubble still persist in the market.

The dilemma is that no country can afford to see that bubble burst as such an event would devastate mortgage borrowers, create a chain of negative reactions and adversely affect the real economy, experts opined.

By Park Hyong-ki (hkp@heraldcorp.com)
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