Jeonse

Operation

ko involves the tenant giving the landlord a large sum of "key money" when a lease is signed. The amount of money required depends on the economy and the location of the property. Usually, the amount required is 50% of the property's value but can be as high as 60-80%. In 2014, it was reported that the average cost of a ko in Seoul equals almost $300,000 USD. The tenant is then allowed to stay in the property "rent-free", not requiring any additional monthly payments, until the end of the lease, which is usually 2 years. Utilities and other costs (water, gas, electricity, cable, phone, internet, security) are applied for and paid by the tenant.

This system is popular with both consumers and landlords. First, there are very few mortgages in South Korea, so it is difficult for consumers to own a home. Also, real estate prices continue to increase so fast that some see the situation as a housing bubble. The landlord makes a return by taking the deposit money and investing it and keeping all interest earned on the deposit. The tenant's deposit is protected by having a lien issued against the property for the amount given. The entire deposit is then returned to the tenant at the end of the lease. The landlord can treat the deposit as a 0% interest rate loan to invest into other capital, which made ko especially desirable in the 20th century when interest rates were very high.

During times of lower interest rates, ko (), or monthly rent, is more often used. With a ko lease, a renter signs a lease for 1 or 2 years and makes a deposit on the apartment equal to perhaps 10% of the market value. The renter then pays monthly rent. In rare cases where damage has been done to the property, the damage has to be fixed to the landlord's standard before a landlord will return the deposit.

History

Origin

The ko system has origins tracing back over a century in Korea, some claim the arrangement began in the 19th century, spurred on by a treaty with Japan, but it became more popular and what it's known as today in the late 20th century, particularly in the 1960s and 1970s. The system was seen as a solution to a shortage of mortgages, spurred on by high-interest rates, which dampens economic activity. This situation was compounded by the rapid urbanization and rural flight occurring, increasing the demand for urban housing. ko facilitated economic development without traditional lending means, enabling urban growth.

Contemporary

The 20th-century era of high-interest rates and a shortage of mortgages is receding. South Korean interest rates for over a decade have remained low, at or under 3 percent. This has made the system less integral and beneficial to property developers than it once was, and has encouraged the increase in popularity of renting via ko, rather than deposits. The newfound low interest rates have somewhat reversed the dynamic of ko, with now many tenants taking out loans for the deposit rather than savings, the interest on the loans each month can often be less than market-rate rent. However, this also means that rate hikes hurt ko, rather than help it as it originally did, since now it's the tenants who are borrowing money and therefore benefit from low rates.

Policy changes

The government has made active efforts to attempt to shift the housing market away from ko and towards ko, increasing tax benefits to renters, such as tax credits, and removing some financial support from those who still opt for ko. In April 2022, monthly ko contracts surpassed ko contracts for the first time, with renting at 50.4% and ko at 49.6%. Recent decreases in ko market share are due to increasing interest rates during COVID-19 recovery, and government policy.

Risks

As ko tenants are not obligated to pay any monthly rent, it may lead them to believe that ko is a great deal in all aspects. However, there is a certain level of risks of which the tenants shall be aware for leasing an apartment by ko.

Rising housing market

ko tenants are taking a financial short position in the housing market. When the apartment price goes down the amount of ko deposit goes down proportionally, although this may not always be the case. In such circumstances, the tenants will get the difference back when they renew the lease, at least in theory. However, if their landlords fail to provide the difference either with their own money or by taking a loan, the tenants are left with a few difficult options such as a lawsuit. On the other hand, when the apartment price goes up the deposit may go up as well, and the tenants shall fill the gap when they renew the lease.

During times of expansion in the housing market, or in cases of excess demand, there can be large hikes in the percentage of the property's value that the tenant must pay. This has been characterized as a crisis in the past, namely in the 1990s, where over a dozen people were driven to suicide in the face of these increases in deposit prices. Such extreme cases have been fixed in the past by large increases in the supply of housing.

Variable interest rates

It is a common practice that ko tenants have the deposit ready by taking a loan from a bank due to the sheer amount of the deposit. If they take a loan with a variable annual percentage rate (APR), which is fairly common, they are exposed to the risk of rising interest rates. However, banks can provide a very low APR (2-4%) as the deposit may be taken as collateral.

According to the latest report by the Bank of Korea, the bank's household loan balance as of the end of December 2020 was 98.8 trillion won. Compared to the end of December 2019, there is an increase of 10 trillion won, the largest since 2004.

Dishonest landlords

Some landlords may have a large amount of overdue taxes. In such cases, the government may put the apartment up for auction in an attempt to collect the overdue taxes. When the apartment is sold, the government collects the overdue profits from the auction. Since national tax () and local tax () take a higher priority than the tenants, they may lose some or all of their deposit, depending on how much their landlords owe the government.

References

References

1. "1.Wolse/Jeonse".
2. Phillips, Matt. (10 March 2014). "It takes $290,000 in cash to rent an apartment in Seoul". [[Quartz (publication).
3. Kim, Tae-gyu. (29 July 2009). "Tenants Face Hard Times From Rising Jeonse Payments". [[The Korea Times]].
4. Herald, Korea. (2015-02-06). "[Weekender] Jeonse, a keystone of Korea's economic history".
5. Phillips, Matt. "Keeping Up With the Jeonse".
6. "Real interest rate (%) - Korea, Rep. {{!}} Data".
7. Hye-jin, Byun. (2022-05-31). "'Jeonse' no more? More Koreans opt for monthly rentals under debt burden".
8. "The jeonse crisis, then and now".
9. (2021-01-14). "영끌·빚투에… 2020년 가계빚 100조 폭증".
10. [http://imnews.imbc.com/weeklyfull/weekly01/3959166_17924.html 최 훈. "집주인이 안 낸 세금, 세입자가 낸다?" 시사매거진 2580, MBC News. 2 May, 2016.]