Science and Tech

South Korea believed it had the magic recipe for the rental market, the "jeonse". Until the frauds started

Screenshot 2024 06 10 185729

The idea is certainly tempting: spend two, three or even four years living on rent in an apartment without paying a single monthly payment, in exchange only for giving the landlord a deposit that is recovered when the contract ends. It sounds almost like real estate science fiction, but in the South Korean residential market they have been applying a very similar recipe for years. They even have a name for it: Jeonsea word that for a time sounded almost like “squaring the circle” for landlords, tenants and even the country’s economy.

Today the jeonse is seen with a growing suspicion. The reason: there are those who have abused the system or have directly taken advantage of it to commit fraud.

What is the jeonse? Another way of approaching the real estate market that has become quite popular in South Korea, different from conventional buying, selling or renting. Your philosophy It is quite simple: the tenant gives a certain sum of money as a deposit to his landlord in exchange for the enjoyment of his home. Of course, with two conditions. First, while the contract lasts, the landlord will be able to use that cash to get the most out of it. Second, when the rental period ends he will return the sum to the tenant. A win-win manual.

Screenshot 2024 06 10 185729

Click on the image to go to the tweet.

The small print. Logically the jeonse It has small print. And some features that do not leave it within the reach of any tenant. The deposit that must be given to the landlord is usually more than considerable, equivalent to between 50 and 80% of the market value of the home, according to Acuityso the deposits add up to hundreds of thousands of dollars. Habitually the 10% It is provided as an initial deposit; the rest during the move. The tenant ends up getting all the money back, right; But after years, he once ends the agreed rental period. And at least in 2021 These lasted two years with the option to extend.

What advantages does it have? For the tenant they are obvious. With the jeonse You can rent a house without having to pay monthly payments. You pay for your home in another way, with the deposit of a more than considerable sum of money. That way she does not lose the savings she has managed to gather and continues to raise money to buy her own home. “Many Koreans see the jeonse as a more economical housing expense than monthly rent and a key step to achieving the dream of homeownership,” they explain from the Asia Society firm.

If the formula is also interesting for the landlord, it is because of what he can do with that money while the contract lasts. For him it is a kind of interest-free credit that he can deposit in a high-profit bank account or with which to make other investments. The objective: make it as profitable as possible. “Instead of collecting monthly rent, the owner can reinvest,” adds City.

Screenshot 2024 06 10 190348
Screenshot 2024 06 10 190348

Click on the image to go to the tweet.

Where are you from? He jeonse It is not the only leasing formula that is applied in South Korea, where it is also used, for example he weolse, more similar to a conventional contract and which incorporates the figure of the deposit and the monthly rent. If the South Korean real estate market ended up triumphing in the jeonse It was due to a combination of factors. The first is probably cultural.

It is said that centuries ago, during the Goryeo dynastyapplied a similar scheme among Korean farmers for land rental. The second, fundamental factor is of a historical and economic nature. The system as it is known today was already mentioned in the Civil Law of 1959 and began to become popular in South Korea throughout the 1960s, coinciding with a context marked by the closing of the tap on mortgage loans and the increase of prices.

A valuable injection of resources. “He jeonse acted as a private banking solution to an overheated real estate market, allowing landlords and tenants to benefit from a lease,” remember Asia Society. For a time, until the 1990s, the formula served in part to boost the country’s economic development. Other sources They point out that a third factor without which it is difficult to explain its popularity is high interest rates.

“It spread amid rapid urbanization, mainly due to limitations in the housing finance market —Acuity notes—. Amid high interest rates and weak financing, owners use the jeonse to quickly access large sums of cash. From a renter’s perspective, the cost of living with jeonse is less than with the monthly rent.

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A well received formula. The proposal of rentals without leases and huge deposits available to landlords was attractive enough to convince a relevant part of the South Korean market. Very relevant. In 2021 Asia Society estimated that the jeonse was applied in the 70% of contracts Seoul rental and KOSIS sample that in 2012 the formula was almost tied with the monthly lease with deposit in the real estate market as a whole.

Losing steam. As the years went by, however, jeonse seems to retreat in the sector. The newspaper recently Korea Times dedicated an article precisely to that loss of ground: the data it manages show that only 46.9% of the 123,669 lease contracts closed in the South Korean capital between January and March were adjusted to the scheme jeonse. It is a significant percentage, but it marks the lowest level for the start of a year since 2011, when authorities began collecting information. 2020 meant 61.6%.

Korea Times goes further and points out that the loss of land from the leasing formula is especially pronounced in the case of “villas”, small five-story residential buildings. He jeonse In that specific market niche, it accounted for only 36.3% compared to the 59.1% they achieved among apartments.

Screenshot 2024 06 10 190816
Screenshot 2024 06 10 190816

Click on the image to go to the tweet.

From the theory to the practice… It goes a long way that helps to understand why the jeonse, although it continues to enjoy a relevant weight in the sector, it is no longer moving at the levels of several decades ago. Over the last few years, there have been published reports of tenants who have not recovered their deposits after the end of the rental. Sometimes they talk directly about “frauds” that leave them in ruin, with debts that in the most tragic cases have led to suicides.

last fall Korea Herald she spoke that, between January and July 2023 alone, almost 4,500 victims of rental housing fraud were recorded with damages worth about $376.5 million. Korea Times point also that the minimum levels in the contracts jeonse of Seoul are explained, at least in part, by the alarm that has been generated among the tenants.

“As housing prices decline, the proportion of monthly rentals has surpassed that of jeonse contracts, largely due to the increased risk of not recovering the entire rental deposit,” warns the signature R114. In many cases, those affected not only lose their savings: to meet the deposits required by the jeonse They request bank loans with the intention of paying them little by little and with the confidence that, after renting, they will recover them.

“My dream has faded”. The phrase is from Park Hyeon-su, 37, who recently told AFP his case: based on marathon days and a lot of work, he managed to raise $73,000 and deliver a deposit. After handing over the money, his supposed landlord vanished. “My dream of owning a house has faded, let alone getting married or having a child.” In another casethe owner of the rented house sold it and disappeared with his deposit. Channel New Asia ensures that over the last few years thousands of people have suffered from the “fraud of the jeonse“.

The law offers some security to tenants and transactions may be covered by rental insurance, but Korea Times It specifies that due to their peculiarities, not everyone meets the conditions to subscribe to these shields. That would be, for example, one of the reasons why the formula has lost more scope in the rental of villas. South Korean authorities have also moved tab to make it easier for landlords to return deposits after renting.

Sum of factors. The fear of fraud or not recovering deposits is not the only factor that explains the “flat” of the jeonse. Although that is a key factor, which he signs up in Korea itself, there are others at play. For example, during the 2007-2008 financial crisis it was already proven that when interest rates fall, landlords have less incentive to want large deposits that they can allocate to savings accounts. In these cases they may prefer monthly rental contracts more similar to those we are used to in Europe.

Already in 2021 Asia Society pointed that, with reference interest rates below 1%, the situation was similar. Another factor that can cause them to lose interest for the lessor is the longer duration of the contracts, signed for two years that can be extended. A third key factor is the price of the home itself, directly related to the amount of the deposits agreed upon.

Image | Chinh Le Duc (Unsplash)

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