Spending more to rent than buy an apartment

A view of an apartment complex in Gangbuk District, northern Seoul. [YONHAP]

Mr. Han, 45, who owns a 56-square-meter (603-square-foot) apartment in Dobong District, northern Seoul, can’t sleep well these days. He wants to sell his apartment, and is willing to sell cheap. But no one wants to buy.

The Moon Jae-in administration's relentless efforts to cool off the real estate market have made a big impact on the market — except for the one it wishes. Prices keep rising, and particularly for jeonse — the lump-sum deposit rental system unique to Korea.

In the jeonse system, tenants pay a large lump sum to live in a property for a number of years. At the end of the term, the money is returned to them without interest. The landlord lives off interest on the deposit. The renter saves for the period of tenancy and, after getting back the deposit, finally buys an apartment.

But these days the economics have gone topsy-turvy. An 81-square-meter apartment in Hwagok-dong, Gangseo District, in western Seoul was recently sold for 390 million won ($341,000). A same-sized flat in the same complex is currently being offered on a jeonse contract for about 400 million won — higher than the sales price.

Jeonse deposits are always large — often 90 percent of the selling price. Nowadays, they are exceeding the selling price.

In other words, people are paying more to rent an apartment than to buy it.

Another 56-square-meter apartment in Banghak-dong, Dobong District, was recently sold for 190 million won. Around the same period, the same-sized apartment in the same complex was let out on a jeonse contract for the same amount.

What's going on? The short answer is the Moon administration's efforts to cool off real estate prices, particularly through taxes.

Under Korean law, people who buy an apartment must pay between 1 to 3 percent of its value in acquisition tax. In addition, people who own an apartment must pay annual comprehensive real estate taxes, which come up to 2.7 percent of assessed value.

Taxes on jeonse contracts are, by contrast, very modest.

According to the Korea Appraisal Board, on-week growth of Seoul apartment prices has been decreasing since July. In the first week of July, Seoul apartment prices rose 0.11 percent compared to the previous week. This has been constantly declining since. On-week growth is now at around 0.01 percent.

Jeonse prices in Seoul, however, continue to rise. In September, jeonse prices in Seoul increased an average of 0.09 percent every week.

“With more people reluctant to purchase properties, average jeonse-to-sales price ratio in Seoul have been increasing as jeonse prices are on a constant rise,” said Yoon Ji-hae, a senior researcher at Budongsan 114, a local real estate information provider.

Jeonse contracts are not without their own risks. Landlords have been known to be unable to return the large jeonse deposit — especially if they're having trouble selling the apartment, as could be the case in the future.

A landlord's last opportunity to sell a property is to put it up for auction — and get only around 80 percent of the average price in the area. That may not cover the jeonse deposit refund.

Between January 2015 and July 2020, about 13,691 jeonse tenants were unable to get their deposits back in full after properties were put up for auction, according to a report by the Supreme Court. The amount of deposits lost by tenants totaled 460 billion won.

In 2018 alone, that amount was about 60.2 billion won, which increased to 73 billion won last year. As of July, it already reached 58.9 billion won for the year.

BY CHOI HYUN-JU, CHEA SARAH [chea.sarah@joongang.co.kr]