Jeonse really feels like an artifact of developing economy with low banking sophistication, continued on due to tradition and a cultural dislike of loans (although, it's usually only a...
Jeonse really feels like an artifact of developing economy with low banking sophistication, continued on due to tradition and a cultural dislike of loans (although, it's usually only a misdirection of loaned money). If you interrogate any of the supposed pros for a developed nation like the modern South Korea, they quickly lead to self contradictions. Like none of it actually makes any sense.
Imo the worse part is that exposes both the tenants and landlords to all kinds of weird, unintuitive market risks. The usual Jeonse setup (a tenant takes a loan from a bank, to pay a jeonse, to the landlord which invests it and promises to pay it back with the property as lien) basically means every participant is taking a number of bets on both the housing market AND interest rates, and none of those bets are obvious.
And people think mortgages are complicated. Try making a de facto 3 pronged trade on the housing market and bond market.
This is my feeling about it (and even though I live in Korea, I am not involved in Jeonse currently and never have been---frankly, I never could afford it!). The cost of housing is so high in...
Jeonse really feels like an artifact of developing economy with low banking sophistication, continued on due to tradition and a cultural dislike of loans (although, it's usually only a misdirection of loaned money). If you interrogate any of the supposed pros for a developed nation like the modern South Korea, they quickly lead to self contradictions. Like none of it actually makes any sense.
This is my feeling about it (and even though I live in Korea, I am not involved in Jeonse currently and never have been---frankly, I never could afford it!). The cost of housing is so high in Seoul that being able to front the money for a jeonse in even a small, old unit ends up being hundreds of thousands of dollars. This debt sandwich is so bonkers to me. My father-in-law has a couple units he has out on jeonse, and the game he is playing is not so much to invest the money, but to pay off the loans for the units until he can later resell them at a higher price once the value goes up. And indeed they have gone up... probably double or triple what he bought them for. Everything seems to ride on the expectation that housing prices will just...continue to rise, which is concerning to me. Our apartment has already doubled in value since we bought it six years ago, which sounds nice, but if we ever sell it then we will not have really gained anything because we will probably need to loan-up again to move into another unit somewhere anyway.
So the deposit is up to 70% of the home's value (according to this which was linked in the original article), which means you basically have to get a loan anyway. I guess it's good that people who...
So the deposit is up to 70% of the home's value (according to this which was linked in the original article), which means you basically have to get a loan anyway. I guess it's good that people who maybe can't get a mortgage for 100% of a property's price can get a loan for 70%, but at the end of the rental period you don't own the property. So it's still a rental agreement after all. That this works out to be cheaper than rent while being effectively a rental system that goes through the middle man of a bank loan sounds... I don't know, kind of like a happy coincidence? I don't see a fundamental reason why this would be better for tenants than traditional rent, although I can definitely see the benefits for landlords since they get an interest free loan.
Is it possible to have a housing market without the concept of monthly rent? For much of the world, this concept seems entirely unintuitive. However, South Korea has been grappling with this question for decades. Jeonse is a unique home rental system in Korea where tenants provide landlords with an initial deposit, often 50% or more of the property’s market value, instead of monthly rent. Landlords can then freely reinvest this deposit money during the lease period to make a profit. Finally, landlords are mandated to fully return the deposit amount to tenants once the lease contract is up.
[...] following the 1959 Civil Act, under which the government officially established the practice, jeonse surged in popularity throughout the 1960s and 70s. The rapid growth of the South Korean economy during these decades continued to push urbanization and brought attention to the issue of the urban housing shortage.
The system’s popularity was largely due to how it could enable both tenants and landlords to reap benefits, especially during a time of high interest rates and climbing housing prices. Under jeonse, tenants could pay a deposit that was cheaper than monthly rent fees, and landlords were provided an interest-free loan to reinvest and maximize profits. On a broader scale, jeonse was even hailed as a triple-win, as banks also benefitted off the booming housing market and had optimistic outlooks on replacement of money not being deposited. As long as housing prices did not fall, tenants, landlords and banks would all maintain consistent profit.
However, recent legal developments have turned the jeonse system into something akin to a pyramid scheme. [...] In 2022, when the government increased the interest rate, many tenants requested their money back to deposit into a bank. This proved problematic to burdened landlords who had used their tenants’ money as leverage to incur heavy debt and buy more houses. Many lost the ability to repay their tenants’ deposits, with some even choosing to flee instead. Many tenants received no payback from their landlords, catalyzing the further fall of the Korean housing market. The bubble had burst.
What a fascinating system. We can see the challenges in that system given the bubble that popped in 2022, but I love that there's so many different ways of handling housing out there.
What a fascinating system. We can see the challenges in that system given the bubble that popped in 2022, but I love that there's so many different ways of handling housing out there.
I live in South Korea and the Jeonse system is a crapshoot. Often times when the renter wants to vacate the landlord can’t return the deposit until they find a new renter. This can be quick...
I live in South Korea and the Jeonse system is a crapshoot. Often times when the renter wants to vacate the landlord can’t return the deposit until they find a new renter. This can be quick sometimes but usually takes a long time. This leaves the current tenant in renting purgatory as they can’t rent a new place since their money is tied up and thus are stuck just waiting.
I utilize a government loan for my deposit. This is good and bad. Good since it’s really low interest rates and I’m protected for landlords defaulting, but bad since most landlords won’t accept these loans since if they can’t pay it back they are now on the hook with the government. Usually apartments owned by the building or a business don’t mind these loans though.
Jeonse really feels like an artifact of developing economy with low banking sophistication, continued on due to tradition and a cultural dislike of loans (although, it's usually only a misdirection of loaned money). If you interrogate any of the supposed pros for a developed nation like the modern South Korea, they quickly lead to self contradictions. Like none of it actually makes any sense.
Imo the worse part is that exposes both the tenants and landlords to all kinds of weird, unintuitive market risks. The usual Jeonse setup (a tenant takes a loan from a bank, to pay a jeonse, to the landlord which invests it and promises to pay it back with the property as lien) basically means every participant is taking a number of bets on both the housing market AND interest rates, and none of those bets are obvious.
And people think mortgages are complicated. Try making a de facto 3 pronged trade on the housing market and bond market.
This is my feeling about it (and even though I live in Korea, I am not involved in Jeonse currently and never have been---frankly, I never could afford it!). The cost of housing is so high in Seoul that being able to front the money for a jeonse in even a small, old unit ends up being hundreds of thousands of dollars. This debt sandwich is so bonkers to me. My father-in-law has a couple units he has out on jeonse, and the game he is playing is not so much to invest the money, but to pay off the loans for the units until he can later resell them at a higher price once the value goes up. And indeed they have gone up... probably double or triple what he bought them for. Everything seems to ride on the expectation that housing prices will just...continue to rise, which is concerning to me. Our apartment has already doubled in value since we bought it six years ago, which sounds nice, but if we ever sell it then we will not have really gained anything because we will probably need to loan-up again to move into another unit somewhere anyway.
So the deposit is up to 70% of the home's value (according to this which was linked in the original article), which means you basically have to get a loan anyway. I guess it's good that people who maybe can't get a mortgage for 100% of a property's price can get a loan for 70%, but at the end of the rental period you don't own the property. So it's still a rental agreement after all. That this works out to be cheaper than rent while being effectively a rental system that goes through the middle man of a bank loan sounds... I don't know, kind of like a happy coincidence? I don't see a fundamental reason why this would be better for tenants than traditional rent, although I can definitely see the benefits for landlords since they get an interest free loan.
From the article:
What a fascinating system. We can see the challenges in that system given the bubble that popped in 2022, but I love that there's so many different ways of handling housing out there.
I live in South Korea and the Jeonse system is a crapshoot. Often times when the renter wants to vacate the landlord can’t return the deposit until they find a new renter. This can be quick sometimes but usually takes a long time. This leaves the current tenant in renting purgatory as they can’t rent a new place since their money is tied up and thus are stuck just waiting.
I utilize a government loan for my deposit. This is good and bad. Good since it’s really low interest rates and I’m protected for landlords defaulting, but bad since most landlords won’t accept these loans since if they can’t pay it back they are now on the hook with the government. Usually apartments owned by the building or a business don’t mind these loans though.
Check out this article on the ‘Villa King’.
https://m.koreaherald.com/amp/view.php?ud=20221219000624
A landlord died and left a mired mess of tied up deposits for 100s of tenants.