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Jeonse loans rise due to government regulations, low interest rate

An aerial view of apartment complexes in Yongsan-gu, Seoul. (Yonhap)
An aerial view of apartment complexes in Yongsan-gu, Seoul. (Yonhap)
South Koreans’ demand for jeonse loans -- designed for investors looking for two-year leases instead of purchases -- increased in July, due to government efforts to cool down the heated real estate market with loan restrictions, data showed Sunday.

According to the data compiled by five major banks -- KB Kookmin, Shinhan, Hana, Woori and NH NongHyup -- the outstanding amount of such loans increased by 2.2 percent, or 2.02 trillion won ($1.8 billion), on-month to 94.55 trillion won as of end-July. The figure increased by 16.9 percent, or 13.6 trillion won, from the last year.

The total outstanding amount of loans hovered below the 2 trillion won-mark in May and June, but shot back above the line last month.

With the number of jeonse deals having declined in July, signs point to the actual rise in lease prices, behind the latest surge in related loans extended to borrowers. The data is in line with new housing laws that went into effect at the end of July, aiming to protect tenants from landlords and excessive rent increase, which pushed landlords to switch to monthly rents from jeonse.

Jeonse is a home rental system unique to South Korea, where tenants pay a lump sum amount as a deposit instead of paying monthly fees. Landlords profit off of the large deposits before returning the entire amount when the rental contract expires. But tenants generally prefer jeonse as well, as the amount is returned to them at the end of the lease.

In this sense, landlords now can gain more profits off monthly rents compared with jeonse, as the record-low benchmark interest rate of 0.5 percent set by the Bank of Korea to combat risks from the coronavirus pandemic, has pushed down local banks’ yield on savings accounts. Placing the jeonse sum in savings accounts until expiration of contract was a safe bet for most landlords here.

According to the Bank of Korea’s statistics system on Sunday, the nation’s jeonse price index compiled by KB Kookmin Bank posted a record-high of 100.898, the highest since the lender started compiling the data in January 1986. The index was based on 31,800 apartment homes and 4,500 multi- and single-unit housings.

In contrast, the number of jeonse lease contracts came to 6,304 in July, marking the lowest monthly level since data tracking began in 2011, according to the Seoul metropolitan government.

By Jung Min-kyung (mkjung@heraldcorp.com)
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