Death of Korea's 'apartment king' leaves 100s in property purgatory
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Tenants like to rent under jeonse because it feels like free rent. The reality is that many tenants need to take out loans to make the jeonse deposit amount. Landlords make more with monthly rent because $2k of monthly rent is a higher return than you can make than receiving a $300k lump some to invest over the two year contract.
The reason why landlords rent under jeonse usually becomes they are really betting on property price appreciation. For the landlord to buy a $500k apartment, they only need to come up with $200k. They can use the $300k jeonse for the rest. When real estate prices increase, things go well. The apartment price appreciates to $800k and 2 years later, they can increase the jeonse price from $300k to $500k. Now you have $200k in extra cash to invest in your next property.
The opposite happens when real estate prices go down as they have been for the past 6-12 months. A landlord rented their property for $300k jeonse but now that prices have depreciated, they can only receive $200k on the market. When the current tenant's lease expires, they are supposed to get the $300k back but the landlord doesn't have this amount available in cash. They need to find a new renter and get money from them first.
With low interest rates, people could afford high jeonse amounts. These high jeonse amounts would lead to properties appreciating even more which would lead to even higher jeonse amounts. Now, interest rates are rising and you see cases like these.
I'm really nitpicking here but overall they've barely gone down over that period. Certain types of real estate may have gone down by 0.1-1% but that's negligible. The Korean news likes to bring it as if real estate is crashing but that's because even prices staying equal was unthinkable in the minds of many Koreans after decades of continuous increases.
Seoul might not change for a few years but a population decrease of 1% each year will not leave the property market unaffected.
2021 is an outlier with excess Covid deaths and also Covid restrictions (particularly strict in Korea) massively leading people to delay marriages which also affects birth rates (again, particularly in a conservative country like Korea). If you search population projections you'll see it will likely take decades before any significant impact is had.
The latest estimate is that the population will drop by roughly 2% over the next two decades. 2% over as many as two decades, during which many black swans can and probably will happen, is clearly very little.
But even that 2% in itself will have much less of an impact than one may expect. A large portion of the elderly population (I expect this to be the majority) lives in real estate that already sees virtually zero demand from the population below 60 years old. Younger people are not going to move into those places. For all the elderly living on the countryside, their passing will have no effect on real estate prices. For most living in cities it will only have an indirect effect at best; the undesirable housing they live in will eventually be demolished, freeing up land and thereby possibly driving down housing prices, but only if new housing is actually built on them.
Elderly poverty is unfortunately a massive societal problem in Korea. A common misconception is that Korea's high suicide rate is due to the high performancs pressure placed on youth but in reality that's only a tiny part of it with elderly suicide, often driven by poverty, is overwhelmingly the main cause.
But there are bad apples everywhere. This seems like Russian roulette - gambling your early life financial stability in that your landlord is a usual straoght arrow so you can pay nominally lower rent.
Even a 5% counterparty risk in return for marginally lower rent seems like a bad deal considering the amount at risk is life changing. The deposit is not held in escrow. A loss of a non collaterized 300k loan in early marriage couples could be devastating.
This is the same in the large majority of other wealthy countries. The difference is that in Korea the pressure for a newly married couple to move straight into a bought or at least jeonse apartment is much bigger. Paying monthly rent is seen as a sin. This completely unrealistic expectation isn't nearly as strong in e.g. urbanized Western-Europe, in some of which it's even harder to get a mortgage than in Korea.
This is boosted by the societal fantasy of ever-rising property prices. This again is also seen elsewhere but in Korea it's much more extreme. Completely understandable as they've been rising for multiple decades straight, but still wildly unrealistic. Japan has gone through the exact same process in the past.
> Chonsei deposits are often very large, at around 70% of house prices
> Chonsei arrangements are popular partly due to the fact that the residential mortgage market in Korea is unusually underdeveloped: mortgages have very short terms, and loan-to-value ratios generally below 40%.
> It is common for tenants to fund Chonsei deposits by borrowing from banks
Many properties in SK are offered via a peculiar scheme, the Housing Subscription System 주택청약제도, which is a result of convoluted history. Basically you should have a dedicated saving account, and your eligibility will be scored by multiple factors including the deposit sum of that account and in particular the period of non-ownership. When you buy a house your non-ownership counter resets; Jeonse will keep it. So if you use Jeonse as long as possible, your chance of being eligible for this scheme will increase.
What is extra weird is that the renters are paying the landlord considerably more than they would need for a downpayment on a mortagage to buy into this scheme. Is it just impossible to actually buy property or get a traditional mortgage? This system seems like the worst of all words. It is hard to see how you come out ahead in this system vs. just regular renting and dumping that money into the market.
Ta latter comment says something like you could, until recently, only get max 30% LTV on a traditional mortgage, but through this system, you can effectively get 50-70%
https://mobile.twitter.com/AnthonyLeeZhang/status/1614107630...
So if you simply wanted to live in a certain area for a while and not get tied down by the legal burden of ownership, getting a jeonse loan would have been a steal compared to a regular mortgage or even renting.
My first jeonse deposit was $90K, $60K of which I borrowed from a bank. Interest on that loan was less than $150/mo. Rent on a comparable apartment would have been upwards of $500/mo at the time. Of course you can't get this kind of deal nowadays, but the scheme made a lot of sense when it worked.
The huge deposits are not held in escrow (though they should be), but as I found out after having to sue to get my Jeonse back, there are ways to protect it if you act in advance:
1) You can register a lean on the property when you first move in in the amount of your jeonse. 2) Do NOT vacate the property until the Jeonse is returned.
That being said, people are mostly just trusting and I don't know of anyone that actually follows those steps. As a foreigner you are especially vulnerable since they know you likely have a flight to catch on your move out week and won't hold the property hostage. That being said, the legal system for these kinds of debts was swift and we got paid quite quickly once a lawyer was involved.
The whole state of Jeonse is quite extraordinary. It has a huge effect on people being able to move away from home, and I would guess a large effect on homelessness overall. It is wild that you have to pay $30,000 USD to just move into a 1 bedroom apartment. I had a small studio near a university and it was $12,000 USD just to move in.
If I do it again I will definitely be prepared for filing a lien and for a fight at move out.
If there is a monthly payment, it's weolse not jeonse. And the large deposit is bojeunggeum (key money). The larger it is, the lower the rent, typically on a standard scale (eg. every $10k more is $100/month less iirc).
But you won't get zero rent without switching over to jeonse. You're talking about upwards of quarter million dollars to start with that.
I've never signed a jeonse contract so not sure if the terms are very different to a 2 year weolse contract or whether the numeric parameters are just different :)
I don’t know the system at all, but it sounds like the money is intended for the landlord to invest. There is mention that a lien is created on the property.
“Monetary Policy Transmission in the The Korean Jeonse System”: https://anthonyleezhang.substack.com/p/monetary-policy-trans...
Historically, in Korean culture it was very common for the extended family to live together. When a child married they often continued to reside with the parents/in-laws until they had saved enough money to move out on their own. Jeonse is far less than the amount required to buy a place, and because they get the full amount back when they move out to a bigger/nicer place (more jeonse), they can build up their savings until they have enough to buy a place.
Back then mortgages were rather rare and even monthly rents weren't that common. Things are far different now of course.
That depends on interest rates. I lived in Korea between 2010 and 2015 and in the end jeonse really didn't make sense anymore. I had a German coworker who went straight from company paid housing to buying his own place after two years, which is not easy as a foreigner. I regret not doing the same. Of course if you look at the higher end of the market, the relative difference can still be fairly substantial. But I lived in an area where you could buy an apartment for say 200M KRW while the jeonse would be 190.
this is still very common in china and it is seen in many other cultures, so i expect korea to be similar.
In a basic sense it's a long-term loan to the property owner, usually in the amount of 70-80% of the total property value, that you get back at the end of your lease. In exchange the following things happen:
- The property owner get lots of cash they can use for investments.
- The tenant lives rent free or at a very low rent considering the value of the property -- allowing them to save significant income for future housing or investment opportunities.
- The tenant gets all of their money back at the end of the lease.
The system is obviously surprisingly fragile, especially in a market that is in a downturn (the IMF period was a big one for example), or if the property owner over leverages the Jeonse money and can't pay it up at the end of the lease.
Jeonses are typically viewed as a stepping stone for young families as they accrue their own savings in preparation to buy their own property to live in. It works because unlike renting, you aren't simply burning your money in a fire every month, you get it back and can add any savings made during the lease to that value to either find another place to Jeonse, or buy a property if you have enough.
Mortgages of course exist, but aren't as favorable as they are in the U.S. and there are all kinds of ownership schemes/systems in place that would make the average American's head spin, often financed by the property developer instead of a bank.
There is also insurance for the tenant, but as you might guess the terms are strict and getting a payout can be difficult. "Insurance fraud investigator" is not an uncommon job title.
Of course this system has caused problems for housing supply and is considered a large part of why apartments in Korea are so expensive. A landlord can simply leverage jeonse after jeonse to acquire massive numbers of properties. Some recent laws put high property taxes on investment or "second" properties, but people find ways around those laws by using family members and friends to "buy" the properties. The state doesn't want to get in the business of repaying tenants as it would incentivize risky investments on the part of landlords, and the state's strategic interest is in increasing the housing supply to lower prices.
Deposits don't sit in escrow as it's intended that the landlord is able to use that money to make themselves money to offset what would have been monthly rent payments.
It's important to remember that from ~1953 to ~1997 or so, if you could get in a business or own any kind of property you could make incredible amounts of money. The market only moved up and there was virtually zero risk to this kind of property scheme. There was a brief "blip" from 1997 to 2003-2004 where it wasn't true, and then the market has basically been back to upward moving until COVID-19 hit again. So for maybe 3 generations, this has become the institutional way that real estate works and has made lots of people lots of money.
It's slowly changing as high-yield investment opportunities disappear and the government cracks down on predatory property speculators -- but it's still a very common system that's unlikely to go away any time soon.
Typical jeonse tenants start with savings equal to 10-20% of the value of the property. (To buy an apartment, on the other hand, they would need a down payment of at least 30-40% due to LTV restrictions.) They borrow the rest of the deposit from a bank. The landlord takes that money and adds their own loan to buy more houses, invest in coins, or whatever. So everything is leveraged at least twice. Of course this scheme all crumbles down when interest rates go up and property values drop.
- It's the general norm that people stay with their families well into adulthood -- often even after marriage and children (with "free" childcare from the grandparents). It's not as common for single adults to have their own property. [1]
- Given this reality of households, families often pool their money for large purchases. Since Jeonse is "guaranteed" returned after a lease, it's low/no risk to individual family members, who all get a place to live as part of the agreement. It also lets people of a variety of economic circumstances all participate in getting high quality housing.
- The average wage in South Korea is <$3k per month (in USD), while housing in the Seoul Capital Area (about half of the population) is at or near NYC prices: or about $10k-$30k per square meter. Most individuals, and even families, thus cannot afford an entire mortgage on their own, but can afford to both pool money and to secure Jeonse loans (which have a lower interest rate than mortgages as the landlord is the guarantor) at lower overall values.
- Jeonse doesn't mean "lump sum for no rent", it's a sliding scale and many properties use Jeonse + some minimal rent. At the other end of the scale the typical Western style "deposit + full rent" is called a Wolse.
- Crashing at a flop house/share house/whatever does happen, there's an entire industry of ultra-minimal cheap apartments, but both social stigmas and once a person gets married and has kids, you need more space quickly.
It's not a perfect system, but during a fast growing economy coupled with a government strapped for cash, it allowed tens of millions of Koreans to move into safe and modern housing. Unfortunately, it's extremely fragile in any other conditions and has lots of downsides in nearly any other market condition. As the Korean state matures and growth slows, I expect it to slowly go away to be honest.
1 - With the exception of Officetels, which are tiny efficiencies meant for working professionals.
Wild inflation rate appears.
I don’t get the economics here. It doesn’t matter who manages the money (apart from the fact that your savings go to someone who is barely able to assess risks), the landlord only keeps the average interest. Why can’t a tenant invest the money themselves and pay the interest to the landlord as usual? Why transfer a principal part as a loan? It doesn’t make a better interest rate.
Jeonse scheme sounds crazy to me: you basically provide a loan to an individual - one of the worst risks in my book, which has indeed bitten hundreds of asses according to $title. Individuals die, disappear, go bankrupt, go to jail, become motivated to screw you. Personally I wouldn’t give more than $1k to a random individual without a proper collateral, no matter how good the legal system works. Trusting them all your savings? That’s insane.
I suppose it doubles as a security deposit in case the tenant mistreats the property. I've known several people who acted as landlords- one rented out an apartment above their storefront, two others rented out their homes when they had to move for work but couldn't find a buyer (this was around the 2008 crash).
All three cases ended with the tenants doing significant damage to the property that wasn't covered by the standard security deposit. I think one case was a secret junkie who went off the deep end, the others were college kids iirc.
I don't think I'd want to be a renter without my key money held in escrow or at the very least a lean held against the property, but that does break the system a bit.
Of course there might be competing claims that may take precedence. Usually mortgage or prior loans. So you are supposed to do research on the property before signing a jeonse. There are also insurances for Jeonse as well.
Having said this, I still agree that Jeonse is crazy. I think South Korea is due for a huge painful recession when the housing, construction and capital market collapses due to Jeonse domino and the Legoland fiasco.
I was in a similar position and was advised against waiting for the property to be auctioned off and try to buy it myself.
Note: outside of a few neighborhoods, most apartments in Korea don't really appreciate in value. People want to buy new.
You are supposed to look at the existing interests in the property before signing a Jeonse but not everyone does that. Besides there are fraud schemes that involves property owner going into debt just before you sign which is pretty bonkers.
This sounds like a pyramid scheme, doesn't it?
s/tenant/investor
s/play their part/ask for their money back
Many well their home to finance it.
I’m sure the details are a little different but the idea seems similar.