Stabilize the abnormal jeonse market first

The rent market has become precarious amid the housing market slump. New leases have become cheaper than the previous ones, unsettling both homeowners and tenants in Korea due to the unique housing lease jeonse system in Korea where tenants put up a lump-sum deposit for the guarantee of long-term lease (from two to four years). Selling homes to provide rent has also become difficult as housing prices have come to value less than jeonse deposits in some areas.

According property data platform R114, of all apartments in Seoul that made new jeonse contracts in the first half, 54 percent settled for jeonse deposits cheaper than two years ago. Due to lower leases, homeowners had to return more than 100 million won ($77,669) on average to renew a two-year lease contract or to make a new contract.

The phenomenon is expected to worsen in the second half. Jeonse prices peaked in December 2021 due to soaring housing and property prices. Jeonse value has sharply fallen since then. R114 expects 58 percent of jeonse contracts to see deposits fall below their value two years ago in the second half even if the jeonse price fall eases.

Bank of Korea shares the view. According to its recent report, the share of rent apartments expected to fall in the deposit value surged to 52.4 percent in April from 25.9 percent in January. The share of homes whose value has fallen below the rent deposit also rose to 8.3 percent from 2.8 percent.

The statistics reflect the heavy toll on the rent market from bad policymaking by the last government. Jeonse prices, which shot up after the three Tenants Acts were implemented in disregard of market principles, plunged from sharp interest rate hikes and an economic slump to cause the disaster. Half of tenants living on jeonse arrangement fear that they won’t be able to get their full money back while their landlords must struggle to find money to match the deposit since they cannot get that much from new tenants.

The government is mulling easing regulation on the debt service ratio so that landlords can borrow money from banks to return the full deposit to tenants. The rent market must not crumble under the collective fear for deposit loss.

The government should be more aggressive in normalizing the rent market. It is time to seriously deliberate on the jeonse system that unnerves tenants at every housing slump period. Of course, the merits of jeonse need to be appreciated as they have helped facilitate the housing mobility for the working and middle class. But the damage on tenants from landlords’ reckless investments through rent deposits calls for an urgent fix.