Jeonse rates continue climbing as housing prices decrease

The rising price of jeonse (a lump-sum deposit in lieu of rent) is continuing despite the summer season, usually a quiet time for real estate in Korea.

According to data from KB Kookmin Bank, the nation’s jeonse prices in July climbed 0.37 percent from the previous month, marking the 53rd consecutive month of increases since March 2009.

The surge was particularly high in Seoul, where jeonse was up 0.52 percent from June, the highest rise since October 2011. The retail price for homes, in contrast, dropped 0.24 percent compared to the previous month.

The July report from the Korea Appraisal Board (KAB) this week showed similar results. According to the KAB, the nation’s jeonse prices in July jumped 0.3 percent from June, while home prices dropped 0.07 percent.

The ratio of jeonse prices to home prices was 60.6 percent on average last month, up 0.3 percentage points from June, according to the KAB. However, in some areas, jeonse prices have risen to 80 percent of home prices, real estate agents claim.

Experts say the jeonse price hike was driven by the government’s decision not to extend the temporary acquisition tax cut and implement no follow-up to the April 1 real estate stimulus package.

“Home buyers are speculating the market is waiting for permanent tax cuts, which is pushing demand toward jeonse,” said an official at the KAB.

The monthly growth of jeonse prices slowed to 0.44 percent in March, according to data from KB Kookmin Bank, a sign that people were waiting for the April 1 stimulus package. However, after the acquisition tax cut was abolished at the end of June, the popularity of jeonse increased again.

Industry insiders trace the rising price of jeonse to the 2008 global financial crisis, which deflated the bubble in the local real estate market. Because people no longer viewed home purchases as sure-fire profit makers, they turned to jeonse, waiting for the real estate market to return to life.

The recent data from the Ministry of Land, Infrastructure and Transport show that 728,763 homes were acquired by jeonse or monthly rent in the first half of the year, up 7.6 percent from a year ago.

“Jeonse prices will continue rising because there are not going to be enough jeonse homes put on the market,” said Ham Young-jin at Real Estate 114, a local real estate information provider. “Existing jeonse renters are renewing their contracts, while home leasers are trying to change to monthly rent to earn a stable income.”

To protect jeonse renters from hikes, politicians from the Democratic Party have proposed establishing a ceiling, stating that leasers can’t increase jeonse price more than 5 percent. The Saneuri Party, on the other hand, has reportedly proposed a price ceiling only for certain areas. However the land ministry appears to be wary of both proposals, fearing they could cause jeonse prices to spike even more in the short term and be difficult to repeal later.

Increasing housing prices would take the pressure off of jeonse rates, but measures to promote home sales - such as abolishing the capital gains tax for owners of multiple homes, eliminating the ceiling on apartment prices and easing regulations for remodeling - are all pending in the National Assembly.

BY JOO KYUNG-DON [kjoo@joongang.co.kr]