Is it possible to have a housing market without the concept of monthly rent?
To much of the world, this concept seems entirely unintuitive. However, South Korea has been grappling with this question for decades. The system of jeonse is a “unique home rental system in Korea, where tenants, instead of monthly rent, provide landlords with a deposit, often 50 percent or more of the property’s market value,”1 according to the Korea Times. Landlords can then freely reinvest this deposit money during the lease period to make a profit. Finally, the landlords are mandated to fully return the deposit amount to the tenants when the lease is up.2
The origin of jeonse is heavily contested by scholars. Some suggest that jeonse contracts date back to the Goryeo Kingdom in the 10th to 14th centuries, with farming land being exchanged for lump sums. Others claim that the custom rose from the migration of the agricultural population to the city after the Byeongja Treaty of Peace opened up three ports in 1876. However, following the 1959 Civil Act through which the government officially established the practice, jeonse surged in popularity throughout the 1960’s and 70’s.3 The rapid growth of the South Korean economy during these decades continued to push urbanization and brought attention to the issue of the urban housing shortage.4
The system’s popularity was largely due to how tenants and landlords could both reap benefits. During this time, interest rates were high and housing prices were climbing. Under jeonse, the tenants could pay a deposit that was cheaper than monthly rent fees, and landlords were provided an interest-free loan to reinvest and maximize their profits.5 On a broader scale, jeonse was even hailed as a triple-win, as banks also reaped the benefits of the booming housing market, and had optimistic outlooks on replacement of money not being deposited. As long as the housing prices did not fall, tenants, landlords and banks would maintain consistent profit.
However, recent legal developments have turned the jeonse system into something akin to a pyramid scheme. In 2020, a new law was passed which allowed tenants to extend their original 2-year lease for an additional 2 years.6 Although this law was aimed at protecting tenants as leasing prices began to soar, the end result was that fewer lease properties became available in the housing market and landlords could now exercise more control over what they charged prospective tenants.
As expected, housing prices dramatically increased; the South Korean housing index “rose from around 80 in 2020 to more than 100 after 2022.” However, these rises only occurred due to the low national interest rate. In 2022, when the government increased the interest rate, the housing market’s subsequent fall burdened the landlords who had bought more houses with a heavy debt. Many lost the ability to repay the tenants, sometimes choosing to flee; the bubble had burst.
The failure of landlords to return deposits put a particularly significant hardship on tenants of the younger generation, who had previously taken advantage of the jeonse system to partially participate in the dream of home ownership.7 According to Korea Housing and Urban Guarantee Corp, “insurance claims for failed jeonse repayments more than doubled last year to a record 1.17 trillion won ($903 million)”, of which 70% were for tenants in their 20’s and 30’s. A credit crunch and decrease in institutional trust now plague the country’s younger citizens.
Jeonse’s failures have resulted in not only severe financial, but also emotional, stress. Soaring housing costs are one of the main reasons why the younger generation is pushing off marriage and having children. According to analysts at the McKinsey Global Institute, “there is a direct link between this financial insecurity and South Korea’s declining birth rate.”8 South Korea, having the world’s lowest fertility rate, may face an irreversible shift in societal structure and family dynamics if this housing crisis, among other issues, continues to persist.9
Jeonse may have been the perfect economic solution for South Korea’s historical agricultural customs, but it has not translated perfectly into modern times. Thus, its future remains uncertain. Would its decline take away a burdensome catalyst for piling debt, or a major vehicle for social mobility?
- https://m.koreaherald.com/view.php?ud=20150206001042#:~:text=There%20are%20also%20suggestions%20that,more%20important%20than%20its%20history ↩︎
- https://english.seoul.go.kr/service/living/housing/ ↩︎
- https://m.koreaherald.com/view.php?ud=20150206001042#:~:text=There%20are%20also%20suggestions%20that,more%20important%20than%20its%20history ↩︎
- https://www.researchgate.net/publication/376132293_The_Influence_That_Jeonse_Rental_System_Brought_to_the_Housing_Bubble_in_Korea ↩︎
- https://www.reuters.com/world/asia-pacific/south-koreas-jeonse-rent-free-renters-hit-by-property-downturn-2023-02-21/ ↩︎
- https://world.kbs.co.kr/service/news_view.htm?Seq_Code=155247 ↩︎
- https://www.reuters.com/world/asia-pacific/south-koreas-jeonse-rent-free-renters-hit-by-property-downturn-2023-02-21/ ↩︎
- https://www.milkenreview.org/articles/keeping-up-with-the-jeonse ↩︎
- https://www.npr.org/2023/03/19/1163341684/south-korea-fertility-rate ↩︎