[Letters] A real-estate solution to the crisis

Jeonse is the dominant type of rental system in Korea, especially in the housing sector. It is unique to this country. Under jeonse, a tenant advances a substantial security deposit, usually up to 40?60 percent of the price of the home. The tenant does not pay monthly rent to occupy the property and the landlord is under obligation to give back the security deposit at the end of the lease. Jeonse has a long history. But I think it became dominant along with high interest rates and a shortage of housing during Korea’s industrialization period. In those days, many families lived doubled up in condominiums and single-family homes. In the 1970s the interest rate for a fixed deposit swung from12?26.4 percent. The high interest rates helped jeonse become dominant. The owners of houses could expect good interest income from the security deposit.

During the industrialization period, I think jeonse worked to sustain the low-wage social structure. If someone could muster the security deposit, he or she could be free from monthly payments and be competitive in the job market. It polarized the housing market between those who could pay jeonse and the poor who could not. Migrant workers from rural areas and the poor lived mostly in poor low-rent housing.

For developers, jeonse was instrumental in boosting their business. Housing was sold out even before construction was completed. This was one of the causes of reckless development in urban areas and real estate speculation.

However, the interest rate slid down to 4 percent since the late 1990s. Consequently, security deposits in jeonse were forced up; along with the sliding interest rate, jeonse kept rising.

The majority of people have most of their assets tied down in real estate. For example, it takes a security deposit of around 150 million won ($105,600) to rent a two-bedroom apartment in Seoul. It takes more than four years to earn that security deposit for an urban worker even if he saves 80 percent of his income. If we take the opportunity cost into account, the common urban laborer spends almost one-fourth of his income on monthly housing payments. In Chicago in the 1990s, I was required to put down $500 as a security deposit for a two-room apartment when the minimum wage was around $5 per hour. This is why in Korea children take longer to become independent from their parents than in other countries. In Korea, a bridegroom’s parents are supposed to help their son to rent or buy a home for the couple. The expensive security deposit is a big burden for them. They have to save most of their income for their children until they are married. And only then can they save for their elderly years.

Many may agree that boosting spending is the key to emerging from the current economic crisis stemming from the credit crunch. However, high housing costs have resulted in shrinking consumer spending. People just do not have enough disposable income. Lawsuits related to security deposits number over 10,000 every year and are on the rise. Cases range from eviction of tenants to failure to return security deposits.

If we can reduce the cost of housing, we can have more disposable income; that will boost consumer spending and investment. It will help our economy emerge from deep recession. The easiest way to do this is to shift from jeonse to monthly rental. That is more effective than giving people subsides or tax exemptions.

To get there, we need mortgages for landlords. When a landlord agrees to shift from jeonse to monthly rent, the government should provide a mortgage loan on the condition that they register to collect rent from tenants. The government can expand the supply of public housing. Also, the government can free itself from the debate of social inequality by, for example, buying unsold housing units. And real estate speculation can be reduced with the loss of leverage through jeonse.

A crisis is an opportunity to change. In the current crisis, the change needs to be radical to get at the root of problem.

Cho Hang-joon, real estate agent, Seoul