As jeonse prices fall, owners get desperate and analysts worry

Apartment complexes are seen from the 63 Square skyscraper in Yeouido, western Seoul, on Monday. [YONHAP]

A free Chanel handbag is being offered to the person who signs a jeonse contract on an apartment in Cheonan, South Chungcheong.

The long-term deposit lease price for the 84-square-meter (904-square foot) flat was 490 million won ($339,585) two years ago. Now the owner is struggling just to find a tenant willing to sign a contract.

Landlords in the same apartment complex have had trouble finding new tenants as the number of apartments available for jeonse has tripled, driving down prices.

Average jeonse prices nationwide fell 0.21 percent in the last week of September compared to the previous week, according to the Korea Real Estate Board (REB) on Sunday.

This is the biggest weekly decline since the data were first compiled in 2012.

In jeonse contracts, tenants pay a large lump sum deposit to live in a property for a number of years. At the end of the term, the money is returned to them without interest.

Since the beginning of the year, jeonse prices have fallen 1.46 percent. In the same period last year, the prices rose 7.17 percent.

Jeonse prices in Seoul and neighboring Gyeonggi have fallen 0.28 percent compared to the previous week. In Seoul, they fell 0.18 percent week-on-week, while in Gyeonggi, they dropped 0.32 percent.

Jeonse prices in Seoul and neighboring Gyeonggi have been falling for 36 straight weeks.

The number jeonse apartment owners still searching for tenants has been growing.

According to Asil, 170,472 units are currently available for jeonse, from 84,560 units a year earlier.

The recent unfavorable turn in the jeonse market is hitting hard those who rushed to purchase apartments in the last couple of years, even aggressively borrowing money to do so.

The rush was particularly notable when the Democratic Party pushed through the Housing Lease Protection Act in August 2020.

Tenants were concerned that prices would jump after leases expired. With interest rates rising, the opposite has happened.

When trying to sell those apartments, landlords are failing to find buyers. Many are now switching their jeonse apartments into monthly rentals.

In April, Korea had more monthly rental contracts than joense, at 50.1 percent. That figure was 52.9 percent in August.

An index by KB Land shows that supply of jeonse contracts outstrips demand, hitting 93.3 last month from 108.9 in August. A reading of 100 or higher means there is more demand for jeonse than supply.

Jeonse deposits in Seo District in Incheon and Yeongtong District in Suwon fell as much as 30 percent year-on-year recently.

There is growing concern that the current situation in the housing market could lead to a major financial crisis with landlords not being able to return deposits once their lease contract ends.

"The current jeonse market could lead to sell-offs, and become a trigger for tumbling apartment prices," said Seo Jin-hyeong, co-representative of the Fair Housing Forum and a professor at Kyungin Women's University.

Some say appropriate measures will need to be drawn up.

"Side effects, such as landlords not being able to return the lump-sum deposit to the tenant, will affect jeonse financing and the market," said Kwon Il, head of the research team at Real Estate Info. "Measures are needed for a soft landing of the real estate market."

BY KIM WON [cho.jungwoo1@joongang.co.kr]