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[Uniquely Korean] Property market changing course

Unique housing contract of ‘jeonse’ now being eclipsed by monthly rents

Jan. 22, 2014 - 20:19 By Park Hyung-ki
A panoramic view of apartments in southern Seoul. (Korea Herald file photo)

Korea’s real estate sector has grown along with its economy. During this time, the market has also dramatically changed.

The country, which used to house clusters of shacks in major cities such as Seoul and Busan in the aftermath of the Korean War, is now filled with high-rise apartments and skyscrapers.

The economic development boom in the 1970s paved the way for the country to alter its real estate landscape by rapidly building standard four-bedroom apartments that could accommodate large families amid the population increase.

The apartments that have long served as most Koreans’ residential homes are known not only for their quantity, but also for the “jeonse” payment method, a unique part of the Korean housing financing culture that continues to exist today.

The financial system of Jeonse, a lump-sum deposit retrievable immediately after apartment contract expires, can only be found in Korea.

Introduced during the economic boom of the 1970s, jeonse was aimed at helping middle-class families save time and money before they could actually buy their own apartments.

Commonly, people pay a two-year jeonse fee.

Those seeking to buy expensive homes purchase a house with loans, then find a tenant to live on jeonse and use the money to pay off part of the loans.

However, this unique financing system is starting to gradually fade away as the country faces a socioeconomic transition. Its population is rapidly aging and the maturing economy can no longer rely on traditional ways of sustaining its growth.

These factors are not only decreasing the number of jeonse apartments, but also increasing the number of monthly rental one-bedroom apartments, ultimately changing Korea’s real estate landscape, analysts said.

“Monthly rental prices and the rate of converting jeonse to monthly rentals (by homeowners) are expected to fall due to oversupply of monthly rental apartments,” said a researcher at Real Estate 114.

Slow transactions in apartment sales have only aggravated the situation for most mid-income families seeking  jeonse apartments. They have dwindled in number and their prices have jumped sharply over the past few years.

The growth rate of jeonse prices in five metropolises, including Seoul and Incheon, outpaced that of apartment prices as of October last year, according to KB Kookmin Bank.

Tax cuts, introduced as part of the government’s housing stimulus measures last year, boosted apartment prices by about 0.4 percent, as well as jeonse rates by 1.1 percent.

Jeonse rates nationwide in proportion to average home prices stood at almost 66 percent as of October last year. This means that jeonse costs around 70 percent of apartment prices on the market.

“The ratio is likely to further increase amid the shortages of jeonse apartments. However, tax cuts including those for property acquisitions aimed at reviving the housing market could serve as a (positive) variable,” said a KB researcher.

This increase in jeonse prices since 2009 in part led to rising household debt at an alarming pace as some consumers opted to take out bank loans to purchase apartments, which now costs about as much as living under somebody else’s roof.

By Park Hyong-ki (