This article was researched in collaboration with PolyMatter, an international affairs Youtube channel with over 1.89M subscribers. You can learn more about the Jeonse system through their video by clicking here.
Is it possible to have a housing market without the concept of monthly rent? For much of the world, this concept seems entirely unintuitive. However, South Korea has been grappling with this question for decades. Jeonse is a unique home rental system in Korea where tenants provide landlords with an initial deposit, often 50% or more of the property’s market value, instead of monthly rent. Landlords can then freely reinvest this deposit money during the lease period to make a profit. Finally, landlords are mandated to fully return the deposit amount to tenants once the lease contract is up.
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, under which the government officially established the practice, jeonse surged in popularity throughout the 1960s and 70s. 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.
The system’s popularity was largely due to how it could enable both tenants and landlords to reap benefits, especially during a time of high interest rates and climbing housing prices. Under jeonse, tenants could pay a deposit that was cheaper than monthly rent fees, and landlords were provided an interest-free loan to reinvest and maximize profits. On a broader scale, jeonse was even hailed as a triple-win, as banks also benefitted off the booming housing market and had optimistic outlooks on replacement of money not being deposited. As long as housing prices did not fall, tenants, landlords and banks would all maintain consistent profit.
However, recent legal developments have turned the jeonse system into something akin to a pyramid scheme. In 2020, the National Assembly and Cabinet passed new legislation which allowed tenants to extend their original 2-year lease for an additional 2 years. Although this law was aimed at protecting tenants amid soaring lease prices, the unintentional 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, many tenants requested their money back to deposit into a bank. This proved problematic to burdened landlords who had used their tenants’ money as leverage to incur heavy debt and buy more houses. Many lost the ability to repay their tenants’ deposits, with some even choosing to flee instead. Many tenants received no payback from their landlords, catalyzing the further fall of the Korean housing market. 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. According to Korea Housing and Urban Guarantee Corp, one of the country’s three major guarantors, “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 distress, but also emotional and social repercussions. 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.” 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.
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 the abolishment of jeonse take away a burdensome catalyst for piling debt, or is it a necessary vehicle for social mobility?
Featured/Headline Image Caption and Citation: Urban view of Busan, the Republic of Korea’s second largest city; photograph by the United Nations | Image sourced from Flickr