As jeonse backfires, Korea needs a managed exit strategy

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As jeonse backfires, Korea needs a managed exit strategy

Published: 05 Nov. 2025, 00:03

Audio report: written by reporters, read by AI

Kang Kyeong-hoon

The author is a professor of Business Administration at Dongguk University

Korea’s jeonse — a unique housing lease system — is based on a cross-collateral structure rarely seen elsewhere. Landlords provide their homes as collateral in exchange for large deposits, and tenants provide the deposits as financing. In economic theory, jeonse functions as an efficient financial contract. When individuals who do not know each other attempt to exchange large sums of money, banks are normally required to mediate and absorb credit risks. Jeonse bypasses that need.

While the jeonse price-to-sale ratio of apartments in Seoul and the greater metropolitan area continues to rise, the ratio has been declining in the villa market — especially in low-priced villas commonly used by lower-income households and young people — due to avoidance following widespread jeonse fraud and a shift toward monthly rent. The photo shows apartment complexes and villas seen from Mount Namsan in central Seoul on Feb. 2. [YONHAP]

Bengt Holmström, an MIT economist and recipient of the 2016 Nobel Prize, argued that pawnshop-style financing is efficient, as high collateral relative to the loan value lowers information costs. Jeonse works by the same logic. In periods when financial markets were underdeveloped, it enabled homebuyers to borrow without bank monitoring, while tenants paid no interest or monthly rent. Scholars Kim Se-jik and Shin Hyun-song have noted that jeonse contributed to Korea’s rapid growth by increasing both saving and investment.

But the system depends on key assumptions. Housing prices must remain significantly higher than jeonse deposit values for tenants to feel secure. In past decades, strong economic growth and population increases meant home values rose consistently, satisfying that condition. Rising home prices also encouraged landlords to prefer jeonse over monthly rent, allowing them to buy more properties with deposit financing.

Those conditions no longer hold. Structural shifts — low growth and population decline — are eroding the foundations of jeonse. In places where home prices are stagnating or falling, the system’s risks are becoming more visible. Inexpensive villas and multiunit homes have seen growing numbers of “cart jeonse” cases, where home values fall below the deposit amount, leaving tenants unable to recover their money.

Statistics show that jeonse is already in retreat. According to the Ministry of Land, Infrastructure and Transport, monthly rent accounted for 43 percent of rental transactions in 2021, 57.4 percent last year and 62.6 percent as of September this year. Yet, in parts of Seoul and surrounding areas where expectations of rising prices persist, jeonse-based gap investments remain common. Investors buy homes by adding deposits to minimal personal capital. High leverage leads to higher returns, encouraging more investment, fueling home price increases and making credit more accessible. As a result, jeonse is deepening polarization in the housing market.

At the same time, jeonse has evolved into a form of informal finance linked to household debt through gap investments. Korea’s household debt is already among the world’s highest as a share of GDP. If jeonse deposits are counted, the ratio becomes the highest globally. What began as a system that helped tenants access housing is now a channel for financial instability.

In short, jeonse has shifted from being a functional housing and financial tool to a source of systemic risk. It once helped tenants avoid monthly rent and served as a stepping stone to homeownership. Today it generates anxiety over deposit returns, increases guarantee insurance payouts and adds to household debt. Policy must now focus on controlling these risks and guiding the system toward an orderly transition.

First, speculative demand using jeonse loans must be curbed. Loans intended for housing stability have been diverted into gap investments, undermining the system’s legitimacy. The government should tighten lending standards and gradually restrict support for households with substantial assets. It should also consider including jeonse deposits in debt service ratio (DSR) calculations. Although legally considered rental deposits, they function like loans. Given the accumulation of household financial risks, integrating jeonse into the broader debt management framework is unavoidable. A gradual approach would prevent market shocks.

Second, the jeonse guarantee system needs reform. While guarantee insurance is essential to protect tenants, excessively high guarantee coverage weakens tenants’ sense of contractual responsibility. Policymakers could lower coverage ratios or introduce co-payment requirements to reinforce accountability.

Victims of jeonse fraud scams grieve the loss of another victim during a press conference held in front of the National Assembly building in Yeouido, western Seoul on May 11, 2023. [NEWS1]

At the same time, tenant protections should be strengthened. Landlords should be required to disclose credit information, and mechanisms should be put in place to notify tenants promptly of any property transfer or collateral registration. Introducing a jeonse trust system is also worth considering. Under such a system, a trustee would manage deposits, reducing the risk of landlord default.

Jeonse is a product of its time. It helped circulate funds when financial markets were underdeveloped and provided benefits to both landlords and tenants. But under conditions of low growth and demographic decline, its sustainability is weakening. As monthly rent becomes more prevalent, the government should consider expanding rent subsidies and tax deductions to ease housing costs. Over the mid-to-long term, policies must ensure housing stability for low- and middle-income households without relying on jeonse

As the system winds down, policymakers must anticipate and manage side effects. A structure embedded in society for decades cannot disappear overnight. A disorderly collapse would shock the housing market. What is needed is a carefully planned exit — one that protects both housing stability and financial stability. It is time to close the era of jeonse with order, not chaos.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.