Monthly Rentals Gain as Interest Rates Stay Low

The shift to monthly rental continues, and lower income households brace for the prospect of more expensive monthly housing costs.

The Ministry of Construction and Transportation said Tuesday that one out of three new residential rentals have been switched from leases requiring one-time deposits ("key money") to monthly rental payments.

Residential leases have traditionally carried 2-year terms with up-front deposits, which the landlord puts into income-producing investments. Part of the deposit, which can range from millions to hundreds of millions of won, is often converted to monthly rent at an annual rate of up to 20 percent.

In areas with a high concentration of apartment units, the rate of change from deposit payments to month rentals reached 50 percent, as in the Gangnam district in Seoul and 40 percent in Inchon, the ministry said.

The rates used for the conversion to deposits to monthly rentals are falling, however. An average rate of 12 percent per year is now charged on the conversion, compared with 14.4 percent in March and 19.2 percent in March last year. The rate would mean a unit that would have been rented for a deposit of 50 million won ($38,300) would now be rented for a monthly rent of 500,000 won.

Although the conversion rate is falling, the ministry said, it still is much higher than market interest rates. A housing industry analyst said property owners continue to try to compensate for low interest rates and historically low housing price increases by switching to a monthly rent basis.

by Kim Young-sae