The idea is certainly tempting: to spend two, three or even four years living as a rental in an apartment without paying a single monthly payment, just in
The idea is certainly tempting: to spend two, three or even four years living as a rental in an apartment without paying a single monthly payment, just in exchange for giving the landlord a deposit that will be taken back when the contract ends. It almost sounds like real estate science fiction, but they’ve been following a very similar recipe in the South Korean housing market for years. They even gave it a name: jeonseA word that for a while seemed almost like “the square of the circle” for homeowners, tenants and even the country’s economy.
Today jeonse is being viewed with increasing suspicion. Reason: There are those who abuse the system or directly take advantage of it to commit fraud.
Why jeonse? It is a different approach to the real estate market than traditional buying, selling or renting, which has become very popular in South Korea. Its philosophy is quite simple: The tenant gives the landlord a certain amount of money as a deposit in exchange for the enjoyment of his or her home. Of course, on two conditions. First, as long as the contract continues, the homeowner will be able to use this money to make the most of it. Secondly, the amount will be refunded to the tenant when the rental period ends. A. win win Manual.
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small print. logically jeonse It has a small text. And some features that no tenant can achieve. According to Acuity, the deposit required to be given to the homeowner is often more than a considerable amount, amounting to 50% to 80% of the market value of the home, meaning deposits can total hundreds of thousands of dollars. Usually 10% is provided as an initial deposit; the rest during movement. The tenant gets all the money back, right; but many years later, when the agreed lease expired. And at least in 2021, it lasted two years, with the option to extend it.
What advantages does it have? These are obvious to the tenant. With jeonse You can rent a house without having to make monthly payments. You pay for your home in another way, by depositing a significant amount of money. This way, you don’t lose your savings and can continue to raise money to buy your own home. “Many Koreans see this jeonse According to the statement of the Asia Society company, this is seen as a more economical housing expense than monthly rent and an important step in realizing the dream of owning a home.
If the formula is interesting for the homeowner, it is because of what he can do with that money as long as the contract continues. For him, this is a kind of interest-free loan that he can deposit into a highly profitable bank account or make other investments. The goal: to make it as profitable as possible. “The owner can reinvest instead of collecting monthly rent,” Cuity adds.
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Where are you from HE jeonse This is not the only rental formula applied in South Korea; Wonderful, which is more similar to a traditional contract and includes a deposit figure and monthly rent. If the South Korean real estate market triumphs jeonse This was due to a combination of factors. The first is probably cultural.
It is said that a similar scheme for renting land was implemented among Korean farmers centuries ago during the Goryeo dynasty. The second fundamental factor is historical and economic in nature. The system, as it is known today, was already included in the Civil Code of 1959 and became popular in South Korea in the 1960s, coinciding with the closing of the tap on mortgage loans and rising prices.
Valuable resource injection. “HE jeonse “This formula acted as a special banking solution to the overheated real estate market, allowing property owners and tenants to benefit from rentals,” Asia Society recalls. Until the 1990s, the formula served to accelerate the country’s economic development for a time. Other sources point out that a third factor whose popularity is difficult to explain is high interest rates.
“It has spread amid rapid urbanization, particularly due to limitations in the housing finance market,” says Acuity. “Amidst high interest rates and poor financing, homeowners took advantage of this loan. jeonse to quickly access large amounts of cash. Cost of living from the tenant’s perspective jeonse less than the monthly rent.
A well-received formula. The offer of rent-free rentals and huge deposits to landlords was attractive enough to convince an interested segment of the South Korean market. Very relevant. According to the forecast of the Asian Community in 2021 jeonse It was implemented in 70% of rental agreements in Seoul, and KOSIS shows that in 2012 the formula was almost linked to rentals with monthly deposits in the real estate market as a whole.
lose steam. But as the years pass jeonse There seems to be a decline in the sector. newspaper lately Korea Times An article is devoted to precisely this loss of ground: the data it discusses shows that only 46.9% of 123,669 leases completed in South Korea’s capital between January and March were on schedule jeonse. That’s a significant percentage, but it marks the lowest level at the beginning of the year since authorities began collecting information in 2011. In 2020, this rate was 61.6%.
Korea Times He goes further and points out that the loss of land resulting from the rental formula is especially evident in the case of “villas”, which are small five-storey residential buildings. HE jeonse In this specific market niche, they accounted for only 36.3% compared to the 59.1% they achieved in condos.
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From theory to practice… It goes a long way in helping understand why jeonseWhile it continues to have significant weight in the industry, it is no longer moving at the levels it was a few decades ago. Over the last few years, there have been reports of tenants not getting their deposits back after the end of the lease. Sometimes they speak directly about “scams” that ruined them with debts, leading to suicide in the most tragic cases.
last fall Korean Messenger We mentioned that between January and July 2023 alone, approximately 4,500 rental housing fraud victims were recorded with losses worth approximately $376.5 million. Korea Times In addition, the minimum levels in contracts jeonse The situation in Seoul is at least partly explained by the alarm among tenants.
“As house prices have fallen, the rate of monthly rents has exceeded the rate of contractual agreements, largely due to the increased risk of not getting the full rental deposit back,” the R114 firm warns. In many cases, those affected not only lose their savings: jeonse They request a bank loan with the intention of paying it off slowly and with the confidence that they will get it back after renting.
“My dreams are over”. This testimony comes from 37-year-old Park Hyeon-su, who recently told AFP about his case: Based on marathon days and hard work, he managed to collect $73,000 and pay a deposit. After handing over the money, the supposed landlord disappeared. “Let alone getting married or having children, my dream of owning a house has faded.” In another incident, the owner of the rented house sold the house and disappeared with his deposit. Channel New Asia assures that thousands of people have become victims of “scams” in the last few years jeonse“.
The law provides some security for tenants and transactions may be covered by renters insurance, but Korea Times He states that not everyone meets the conditions to subscribe to these shields due to their unique features. For example, this may be one of the reasons why the formula loses its scope more in villa rentals. South Korean authorities have also moved to make it easier for landlords to return deposits after renting.
Sum of factors. Fear of fraud or failure to recover deposits is not the only factor explaining the bank’s “flat” situation. jeonse. Although this is an important factor pointed out in Korea, there are other factors at play. For example, it had already been proven during the 2007-2008 financial crisis that when interest rates fell, homeowners had less incentive to ask for large deposits that they could allocate to savings accounts. In these cases, they may prefer monthly rental agreements similar to those we are used to in Europe.
Already in 2021, the Asian Community noted that the situation was similar, with reference interest rates below 1%. Another factor that may cause interest loss for the lessor is that the duration of contracts signed for two years is longer and can be extended. The third important factor is the price of the house, which is directly linked to the agreed upon deposit amount.
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Ashley Johnson is a science writer for “Div Bracket”. With a background in the natural sciences and a passion for exploring the mysteries of the universe, she provides in-depth coverage of the latest scientific developments.