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Comment by Leftium | Hacker News Reader

I believe the system started when there were double digit interest rates (in the 80's?).

Now interest rates are much lower, but Koreans got used to paying $0 rent and anything above that feels like they are being ripped off.

One reason landlords like the system is because they can daisy-chain the purchase of multiple properties. They take the first cheonsae deposit and use it to purchase another property, then use the cheonsae deposit from the 2nd property to purchase a 3rd property, and so on...

Even if landlords don't receive monthly rent, they expect to earn money on the increased value of the property. Cheonsae contracts are normally 2 years, then they can ask for more deposit or sell the property for a profit.

More info: https://en.wikipedia.org/wiki/Jeonse

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> One reason landlords like the system is because they can daisy-chain the purchase of multiple properties. They take the first cheonsae deposit and use it to purchase another property, then use the cheonsae deposit from the 2nd property to purchase a 3rd property, and so on...

That sounds like it’d be a disaster during a liquidity crunch.

It becomes a too-big-to-fail system, with the government stepping in as needed (implicit subsidy).

How even would the government step in with it being landlord to landlord like that though? It's not centralized in any way.

Buying the assets for enough to cover the landlord's debts. then liquidate the assets for market value. The government could even just hold the assets themselves.

Korea is an economic experiment of monstrous proportions in many ways. There are a lot of risks that are specific to their system buy it feel like even if the whole thing massively blew up at this point that the average Korean would be better off than if they had never taken the risks.

This is the natural outcome of building an economy based on usury/interest, which is exactly what this transaction is.

Maybe I'm missing something here, and I just read the Wikipedia article you linked. If the landlord takes the cash and buys the property, then the cash is gone and there is no cash to get interest on. Does the landlord just pocket the property appreciation?

In a way yes. But its also using leverage to amplify your gains.

Say I get $90,000 to go buy a house, I spend the $90,000 and have 1 door. I get a tenant in it and they make a $90,000 down payment. I then go buy another house and get another tenant in it and they make a $90,000 down payment. I now have two houses and still have the same amount of money I started with, I can continue this cycle and as long as property appreciates I don't just get the property appreciation from one house I get it from all of the houses so (% appreciation * property value * number of properties).

Say it is a $100,000 property and it appreciates 3%. If I had just bought one house and put the money in an interest yielding savings account I would get some low % return. If I instead chained it to acquire 10 houses I would get $30,000 return, which is 30%. But if the value of the house goes down it works against me!

Obviously this ignores transaction costs, interest costs etc.

> Say I get $90,000 to go buy a house, I spend the $90,000 and have 1 door. I get a tenant in it and they make a $90,000 down payment.

Why wouldn't the tenant spend $90,000 on the house themselves, cutting out the middleman?

Korea has a housing lottery where they give you first dibs on a new apartment at an extremely discounted price with financial assistance. Due to demand, this housing is difficult to get even at full price. However this lottery is only available to first-time homeowners. So my friend chose to do cheonsae instead of outright buying a place to save his housing lottery ticket.

Usually cheonsae deposit is less than 100% of the purchase price, so it costs less. Even if the difference is small (10%), you are guarded from drops in real estate value. If you put down $90,000 deposit you should get back exactly $90,000 even if the property value dropped below that.

And perhaps cheonsae loans are easier to get than house mortgages. I'm not sure about this, but the deposit may be better collateral than the property?

What happens if two or more tenants want to move out at the same time? With the strategy you describe the landlord only has cash for one reimbursement.

Sell both properties and realise (perhaps pre-maturely) the capital gains?

This feels like it should be illegal. Just by random chance there will be a point in time where enough tenants ask their deposit back at the same time, and you enter one big economic crisis. Of course, banks also have this risk of a bank run, but the difference is that big banks are tightly regulated and have a strict reserve rate they have to abide to (usually >5%). I wouldn't trust a big population of landlords who manage their own finances, and have a big incentive to cut corners.

If anyone knows a method to short Korean housing, please let me know!

> they can daisy-chain the purchase of multiple properties. They take the first cheonsae deposit and use it to purchase another property

And then they have to return the deposit eventually... how is this different from a Ponzi scheme? :P

You ask jokingly, but the serious answer is that there's an actual scarce asset behind it. Sort of like Bitcoin ;) Whether the scheme artificially inflates the value of the asset remains to be seen of course. I feel the fact that the contracts usually only last 2 years or less really takes the sting out of the risk of collapse, but I'm no economist. Also if it's been going on since the 80's, that means it's been going strong through 30 years of turbulent economical climates.

With a ponzi scheme, there is no underlying investment. So the pool of capital never grows.

This Korean system should work in theory. People generally don't move very frequently. As long as there's a liquid market for investments in stocks & bonds, and the housing appreciates in value over the long term, it's not a bad system.

Seems pretty favorable to the landlords too. They get $90k up front for a $100k house. Which they could invest for an 8% or so return, which, in the first year is ~$550/mo in rent, compounded each year, minus maintenance. Yield wise, $7k on a $10k investment ($100k house - $90k from renter) is fucking amazing.

The fact that is has been around for so long suggests that it works in practice too. Yeah, maybe a black swan event causes a liquidity crunch. But so long as the government steps in to provide liqudity (low interest mortgages would work), then it shouldn't hurt too bad. Worst case, foreign investors step in to buy up the real estate.

> With a ponzi scheme, there is no underlying investment. So the pool of capital never grows.

The "pool of capital" never grows here, either. Landlords get more assets (houses), but also more liabilities (deposits).

A Ponzi scheme is perfectly capable of having underlying investments, by the way. I'm pretty sure Madoff bought houses with his money, too.

> Which they could invest for an 8% or so return

Where the heck do you get an 8% return with no risk? I want in.

> The fact that is has been around for so long

How many decades did Madoff's ponzi scheme last?

This reads like a Ponzi scheme, if you consider the tenants as investors.

In a country with the third highest population density in the world and a solid advanced economy? (discounting city-states and low-population states)

There are worse places to make that bet.

If everyone makes the same bet, it can still lead to disaster (real estate must rise! Let's all speculate on real estate! --> eventual disaster).

Or let's put it this way: a rational bet is something like, this thing is worth $50 now, it will be worth at least $100 later. An irrational bet is one like "this thing will be worth more over and over again!" If everyone things like that, then the thing's price will keep rising until the bubble bursts.

That sounds like the reasoning used in the US before the big 2008 housing market crash.

The US is not #3 in population density. ;)

That doesn't matter, it's just a matter of time before it crashes imo.

The fundamental reason the US housing market crashed was that mortgages were written on properties that couldn't be sustained by income.

South Korea has two characteristics that directly impact that: scarcity of land (relative to population) and a solid, world-leading economy in many high margin industries.

It's not inconceivable property with such qualities could increase in value forever, and still be properly valued.

So saying "Just like 2008 US" is a pretty pithy distillation of a number of complicated factors.

But why couldn't the renter use the deposit to buy a house instead?

It makes zero sense to me that you would have 80% or even 50% of a property’s market value and not just buy the place as opposed to letting someone else.

Do they not do home mortgages in South Korea? Are properties expected to go down in price?

Whether properties are expected to go down in price or not doesn’t change the fact that their is always a risk that property drops in price.

It would affect whether or not someone feels like buying it.

Maybe buying a house would be less liquid?

Since you seem to get the whole deposit back, it seems like it'd be preferable to rent in many situations if the landlord still assumes liabilities (repairs, disasters, etc) and the costs associated with them. If it's "free" to live there either way, I'd rather someone else cough up 10k for a new AC, heater, etc.

Why would you not want to pay more rent and invest the rest of the savings yourself? The landlord (at least in the US) almost always has to pick up the tab for all those repairs anyway.

You also get to avoid the risk of the landlord not giving you a large sum of money back.

Risk… you are exposed to the risk of decreasing property values if you buy.

But as a renter, you are exposed to the risk that your landlord won't have your deposit when you are ready to move out. To me, that seems like a bigger risk.

You know they at least own the house that costs more than what they owe you, so in a court you can probably regain your money

I don't know much about the system... is there an escrow service? Insurance?

Someone mentioned this elsewhere, but they can't. Housing in scarce and distributed via a lottery system.

Sounds like a recipe for a housing market collapse...

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