Jeonse tricks no longer work as prices fall and market freezes

Gangnam Central I-Park apartment in Yeoksam, Seoul. [HAM JONG-SUN]

A 48-year-old owner of a property in Namyangju, Gyeonggi has a problem.

He is moving into a new apartment in Seoul and can't find a buyer for his old place.

Actually, he has two problems: he can't even find a person to take the apartment under a jeonse contract, in which a huge deposit is paid instead of monthly rent.

Because of this, his grand financing plan is falling apart. He won't have enough money to make payments on the new flat.

"I have no other choice but to further lower my jeonse price," he said.

Higher rates are making the already chaotic real estate market more so.

While newly built apartments are usually highly attractive, landlords are struggling to find tenants. The jeonse contract is essential to some landlords in helping them pay off their debt, usually 60 percent of the newly purchased apartment prices.

Many are lowering their jeonse prices.

The market also seems to be seizing up in Gangnam. Among the 499 residents at Gangnam Central I-Park in Yeoksam-dong, 20 percent of the residents are overdue on payments.

The landlords of the apartments are also struggling to find tenants interested in moving in, forcing them to lower jeonse prices.

There were several jeonse contracts that were signed between 1.4 and 1.5 billion won for 59-square-meter units at Gangnam Central I-Park earlier this year. They are now priced at about 1.2 billion.

"Earlier landlords were hesitant to lower their jeonse prices as they would be restricted from raising prices for four years due to the jeonse contract regulation," said a neighborhood realtor. "But nowadays as many of the apartments remain empty, there has been an increase in the number of landlords willing to make adjustments."

In 2020, the Democratic Party pushed through bills that automatically extended jeonse contracts for another two years once the first two years expires while limiting increases to 5 percent on the first renewal.

Residents of an apartment complex with 1,048 units in Dongdaemun District, which was completed recently, have started moving in this month.

However, two months ago, some 84-square-meter apartments were leased under jeonse contracts for 900 million won. Today, the prices are now around 700 million won.

"There are more landlords offering jeonse apartments than those looking for them," said a real estate agent in the neighborhood who asked not to be named. "It's likely that jeonse prices will drop further as time goes by."

Residents are expected to move into a 5,300 unit apartment complex in Seongnam in November, but landlords are struggling to find jeonse tenants even when prices are dropped.

The jeonse price for a 59-square-meter apartment in June was between 400 and 500 million won. It is now 300 million won.

"I had no idea that the jeonse on such a small apartment would drop 100 million won in just a month," said a real estate agent.

The jeonse market has frozen in recent months as the central bank has raised rates from a historic low of 0.5 percent in August last year 2.25 percent in July, the highest level since August 2014.

More increases are expected, though Gov. Rhee Chang-yong suggested on Monday that they will be taken up a quarter point at a time rather than a half point.

Landlords are also struggling to find buyers even if they want to sell their properties because of the tightened loan regulations.

Starting July, the debt service ratio (DSR) of 40 percent applies to all loans above 100 million won from 200 million. The DSR applies to most loans, not just mortgages, though jeonse loans are excluded.

Park Hap-soo, adjunct professor at Konkuk University's Graduate School of Real Estate Studies, said the situation could get worse.

"For the time being due to various regulations including DSR, the real estate market will likely freeze more," Park said. "As such, the empty new apartment situation could continue for the time being."

BY HAM JONG-SEON, LEE HO-JEONG [lee.hojeong@joongang.co.kr]