From bad to worse (KOR)The Moon Jae-in administration is going adrift on real estate policy. Although it took wrong steps to address soaring apartment prices in Seoul from the beginning, the liberal government continues going in the wrong direction. The confusion was fueled by stunning remarks from Hong Nam-ki — the controversial deputy prime minister for economic affairs and finance minister — in his third meeting on Wednesday with related ministers. He abruptly announced a plan to lower the “rate of conversion of jeonse (long-term rent on lump-sum deposits) to jeonse (long-term rent on lump-sum deposits) to monthly pay” to 2.5 percent from the current 4 percent.
Hong cited the need to help ease the financial burden on a number of tenants. But his solution will likely backfire this time too, because he has once again resorted to a quick fix to resolve side effects of three controversial real estate bills railroaded through the legislature by the ruling Democratic Party (DP) last month. At the time, the government obligated landlords to report deals with tenants to authorities to “protect the rights of tenants,” extended the mandatory lease period to four years from two years and limited the conversion rate to 5 percent. As a result, many landlords converted their contracts with tenants from jeonse to monthly rent.
Therefore, the government lowered the conversion rate to 2.5 percent from 4 percent to help ease the financial burden on tenants. For instance, if a landlord shifts 200 million won ($169,780) out of a 500 million won jeonse contract to monthly rent, a tenant’s monthly pay decreases to 5 million won from 8 million won — a 3 million won reduction — on an annual basis.
However, the market does not work that way. On the landlords’ part, they don’t have to lease an apartment at an interest rate lower than our average mortgage loan (2.49 percent). In addition, landlords must pay brokerage fees and costs for repair and maintenance. Under such circumstances, landlords will be reluctant to convert jeonse to monthly rent. In other words, the DP’s real estate bills will only lead to a scarcity of rental apartments and soaring jeonse prices. After apartment prices in Seoul rose for 59 consecutive weeks, people have more trouble finding jeonse now. Moreover, as the conversion rate is not binding, it will certainly provoke disputes between landlord and tenants.
Landlords are choosing to raise jeonse prices and even change jeonse to monthly rent before the controversial bills take effect as early as next year. Tenants will fall victim to the government’s reckless real estate policy. One quick fix after another cannot solve the real estate conundrum. The government must stop its desperate experiments immediately.