[Column] The end of jeonse

Lee Sang-ryeol
The author is an editorial writer of the JoongAng Ilbo.

The Democratic Party (DP) used its ruling majority power in full force under president Moon Jae-in. On July 30, 2020, it railroaded through the Housing Lease Protection Act mandating renewal of a two-year lease for another two years if the existing tenant wants and a cap on the increase in jeonse prices. The government put the act into effect the following day. It took just two days for the bill to pass the Legislation and Judiciary Committee and the plenary session to go into effect as a law. Little time was allowed for fine-tuning and examination of potential side effects. The upset from the sudden change fueled housing and rent price hikes to harden a number of tenants despite the original design to protect them. The failure invited more abnormalities. Novice lawmaker Yun Hee-suk of the conservative United Future Party said that if she were a landlord, she would rather have her children or nephew live in the apartment instead of renting her home out. “Jeonse is done,” she lamented. Supply of jeonse — a unique residential lease arrangement in Korea where an upfront refundable deposit is made in return for rent free living for a fixed period — dried up pretty soon. Landlords who had to keep the same tenant for four years with the rise in renewable deposit rate fixed at 5 percent chose to forgo jeonse arrangements or ejected their tenants before new conditions applied. Jeonse prices shot up as a result.

The housing crisis is the result. Due to a lack of apartment suppliers, home buyers and tenants turned to multi-dwelling units. Villa sales and jeonse prices soared. A dire shortage fed scams. Speculators fixed jeonse prices extraordinarily high for newly-built villa units and made profit by selling them cheap. If not for a steep jump in housing prices, schemers could not have flourished, according to real estate experts.

The jeonse market is chaotic now. Due to a plunge in housing prices, some of them are valued even below jeonse prices. Landlords cannot find new tenants to refund the deposit. The share of jeonse in the nationwide rent market fell to 45.4 percent in December last year from the usual 60 percent. Experts predict jeonse could disappear one day at this rate.

A passerby looks at apartment jeonse prices posted on the window of a realtor, July 2, 2021. [NEWS1]

Lessees are shunning jeonse due to high interest rates and fear of fraud. Rising interest rate can discourage jeonse demand. Those who had to take out loans to pay the lease would suffer higher borrowing costs. Their interest burden weighs over their household income. The spread of jeonse fraud shook the foundation of the unique system in Korea. Tenants fret whether their deposits are really safe. Even after checking tax history and registration documents, one cannot be entirely safe from schemers. Basically, jeonse is based on the trust that the lump-sum deposit would be safely returned in time for move. If the trust is broken, tenants will avoid jeonse.

That’s not all. The jeonse share began to shrink from the latter half of 2021. The ratio fell to 55.5 percent in July, 54.8 percent in August that year, and 51.2 percent in February 2022 and dropped to 49.9 percent from April. In July 2021, the base interest rate was at the record-low of 0.5 percent as a result of the pandemic. In April 2022, the policy rate was still low at 1.5 percent. This was before the jeonse frauds were reported in the media. Interest rate increases coupled with the wave of jeonse scams wreaked havoc on the market by the time the Housing Lease Protection Act turned 1 year old in August 2021. The reckless legislation triggered the doom of jeonse.

The keystone of the Lease Protection Act was to reign in leasing prices. The rent price that should be determined by the market came under a legal cap. Price control is a leftist approach. Proponents argue that the move will help consumers and ordinary citizens. But the results were the opposite as I mentioned. Price control distorts the market, breeds profiteers, and harms ordinary citizens.

Once a market is wrecked, it can hardly recover fully. It is premature to say whether the death of jeonse is good or bad. But people no longer can dream of owning a home one day through savings and shifting jeonse rents. Is that really what the DP lawmakers want to see?