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New rental paradigm prevailing in Korean housing market

Tai Jeong

By Tai Jeong

Technical Director, Canada Wood Korea

September 18, 2013

High rise apartment built in Busan city

High rise apartment built in Busan city

Korean rental paradigm is imminently shifting from jeonse system to monthly rental. Jeonse, or large-sum deposits, is a unique rental system that merits both to the owners and tenants in Korea but is losing its luster due to extremely low interest rates and a rapidly aging society. Korean apartment (which is equivalent to condominium in Canada) owners were able to use the jeonse funds to further leverage for the purchase of another apartment, or deposit them at banks that offered stable, double-digit returns in years past. Korean tenants, on the other hand, were able to buy time by saving some of their wages while living in jeonse apartments, in the hopes of buying a house in the future with their savings, recoverable jeonse deposit and very few loans.

However, Jeonse system favorable to both owners and tenants is losing appeal and being projected to be gradually phased out and replaced with monthly rents.

According to the MLIT’s data, transactions of monthly rental apartments reached a record high, accounting for nearly 40% of total jeonse and monthly rents in the first seven months of 2013, compared with 34% for the same period in 2012.

Though there are not many choices in the Korean housing market, Korean apartment prices are too high, as are jeonse prices and Korean tenants are unwilling to choose monthly rent as that would further eat into their income, leaving them less to save. Korean tenants are also reluctant to take out another loan just to finance their living expenses as that would increase their financial burden, even though an increased loan extension seems to be the only government policy that can directly benefit them for now.

The ongoing paradigm shift in the housing market, where the number of jeonse apartments is decreasing and that of monthly rental homes increasing rapidly, is making the young generation and the middle class uneasy.