Oh Jong-suk, a 41-year-old office worker in Seoul, could not fall into a deep sleep after receiving a call from the landlord of the home he has leased.
As his two-year housing contract draws toward its expiration, the property owner demanded a 20-percent increase in the rental deposit, dubbed jeonse here, if Oh’s family wants to stay longer.
The bread earner with two kids in elementary school has been on the lookout for other jeonse housing, but opted to ditch his plan to move as jeonse prices have jumped more than 20 percent, even by 30 percent, over the past two years.
After days of talks with his wife, he decided to renew the two-year contract for their current lodging. But it’s not over until it is over — how to finance the increased jeonse deposit is another nagging concern for him. He already borrowed some 40 million won ($34,000) from a bank two years ago.
“I can’t throw off how I can meet the amount,” said Oh. “For me, people say, I was lucky because few jeonse houses are available for rent out there.”
Oh’s case is a grim reminder of the brutal reality facing many other tenants in Asia’s fourth-largest economy. Extending a two-year home lease contract by one more term is almost impossible in South Korea, especially in the metropolitan area and the suburbs — not only because of financing problems, but also because of a supply shortage.
Jeonse, South Korea’s unique but long-held housing lease system, had been popular until late 2000 as landlords could generate decent returns on hefty deposits at banks that offered rates of over 5 percent.
For tenants, the system, seen as an alternative to home ownership, was also favored as they did not need to make monthly rental payments.
But the arrival of a low growth trend, coupled with ultra low interest rates, has forced many landlords to favor monthly rental payments, which have sharply reduced the supply of jeonse residences, and in turn, jacked up the prices.
Data from KB Bank, one of the country’s largest retail banks, show that jeonse prices have risen for 78 straight months as of August, with jeonse prices skyrocketing 63 percent across the country over the cited period.
“Despite government measures to rein in galloping jeonse prices, there are no signs of a let-up,” said Park Won-gap, an advisor for KB Bank’s property business. “For the time being, jeonse prices will continue to rise given the short supply and seasonal factors.”
The continued rise in jeonse prices has led to a vicious cycle: landlords have made up for the interest rate drop on jeonse deposits with increased jeonse prices from their rental homes.
The jeonse crisis, meanwhile, is prodding already highly leveraged South Koreans to opt to buy homes rather than rent, which in return led to a rise in housing prices, a stark comparison from a trend seen in the past when tepid demand for housing purchases prevailed due to low prices.
The steady rise in housing prices is not surprising as the government has allowed households to borrow more to buy homes as part of efforts to kick-start the slumping economy.
Since August last year, Seoul has been moving to spur domestic demand, partly by boosting property transactions. To do so, the finance ministry encouraged people to borrow more by easing regulations on mortgage lending. The relaxed rules enabled homebuyers to borrow up to 70 percent of their property value and 60 percent of their income for mortgage payments.
The Bank of Korea has underpinned such efforts, lowering the key interest rate by a total of 1 percentage point to a record low of 1.5 percent through four rate cuts — in August and October last year and March and June this year.
Whatever the outcomes are, the jump in housing transactions has ended a years-long slump. Apartment transaction prices in Seoul, for instance, have risen 3.25 percent this year, which is nearly three times faster than a 1.1 percent annual increase last year, according to KB Bank.
“But the real situation is that they are forced to buy. Actually, jeonse demand has switched to home-buying because people cannot meet the rising jeonse prices and the jeonse supply is very limited,” said Lee Nam-soo, an analyst at Shinhan Financial Investment Corp.
Further complicating the matter is a rise in household debt at a pace that is staggering.
Outstanding mortgage loans by the country’s six major commercial banks, including Kookmin and KEB Hana, reached 327.9 trillion won as of the end of August, up 6.4 trillion won from the previous month, marking the sharpest rise for the month of August since the relevant data was first compiled in 2010.
The August reading marks a 39.6 percent spike from the same month last year, when Seoul began to ease ceilings on household lending to spur the property market. (Yonhap)
