Korean Youth Grapple with Emotional Consequences as Jeonse Housing Market Bubble Bursts

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1- Jeonse: A Win-Win Partnership

Jeonse serves as a symbiotic arrangement benefiting both tenants and landlords, particularly during times of escalating home prices and high interest rates. For financially constrained individuals unable to purchase a home outright, Jeonse allows them to secure a loan for their rental deposit at a lower interest rate compared to regular rent payments. Consequently, aspiring homeowners can realize their dreams of owning property even in one of the world's most expensive housing markets.

2- The Popularity of Jeonse-Style Rentals

Jeonse-style rentals have gained significant popularity among young Koreans in their twenties and thirties who are unable to afford a full property purchase. This demographic finds Jeonse an attractive alternative as it eliminates the burden of monthly rent, allowing them to focus on savings and future homeownership plans.

3- A Bursting Bubble: The Challenges Encountered

While many viewed Jeonse as a secure investment strategy, recent years have witnessed a decline in the market. Median house prices experienced a 12% dip, accompanied by a 7% decrease in Jeonse rents over the past two years until January. In stark contrast, prices had skyrocketed by 37% and 24% respectively during the preceding four years. Though landlords ideally return the entire deposit upon termination of the contract, some circumstances prevent them from doing so, leaving tenants with significant financial losses.

4- The Korean Government's Response

In light of the increasing number of Jeonse-related disputes, claims for insured Jeonse debts skyrocketed to a record-breaking 1.170 billion won ($903 million) last year, as reported by the Korea Housing and Urban Insurance (KHUAP). The insurance agency accounts for one of the top three insurers in the Korean market. Renters in their twenties and thirties accounted for a staggering 70% of these claims. Recognizing the need for intervention, financial authorities collaborated with other agencies to assist both tenants and landlords struggling with refund issues. However, instances of organized fraud related to Jeonse have also seen a three-fold increase in 2022 compared to the previous year, with the police recording 622 reported cases.

5- The Looming Debt Burden

As per the Bank of Korea (BoK), Jeonse-style loans have quadrupled in less than six years, reaching 172 trillion won ($132 billion) until October of the previous year. This accounts for 17% of South Korea's mortgage balance and contributes significantly to household debt. In light of the challenging market conditions since 2022, landlords unable to return deposits face substantial losses when their properties are auctioned off.

6- Mitigating Future Risks

Experts emphasize the necessity for the government to implement policies beyond the existing 40% Debt Service Ratio (DSR) rule. This rule mandates that individuals obtaining home loans cannot allocate more than 40% of their annual income to principal and interest payments on all loan products. With property prices and rents continuing to plummet without clear signs of recovery, investors find themselves grappling with the detrimental consequences of ill-timed investments.

Jeonse's unique real estate investment paradigm has both its advantages and drawbacks. While it initially offered a mutually beneficial solution for tenants and landlords, recent years have witnessed a decline in the market, causing financial challenges for both parties. However, the government has taken steps to address the increasing number of refund-related disputes and instances of fraud. As the real estate landscape evolves, it remains imperative for policymakers to implement comprehensive measures to mitigate risks and safeguard the interests of all stakeholders involved.