Retiring baby boomers weighing heavily on rental housing

The influence of retiring baby boomers is weighing heavily on the market for “jeonse,” Korea’s unique rental system in which a tenant loans the landlord a lump-sum deposit in return for a two-year rental.

As landlords increasingly favor charging monthly rent, however, the number of jeonse homes is dropping and the lump-sum amounts are skyrocketing.

Baby boomers, or those born between 1955 and 1963, make up 14.6 percent of the population. With real estate assets accounting for 83 percent of their combined assets, baby boomers have become major players in the real estate market.

○ Weighing heavily on jeonse market

The increase in jeonse prices has been particularly steep since last year and shows no sign of abating. A survey by Kookmin Bank found that jeonse prices nationwide rose 7.1 percent last year, the highest in eight years and more than double the 3.4-percent rise in 2009. The large number of people seeking to move before spring has fueled demand.

A real estate agent in Seoul’s Jamsil district said, “Many landlords are raising jeonse prices way above market prices.”

The rise in jeonse prices is mainly due to an imbalance in supply and demand resulting from a decline in the number of people moving into newly built homes. A combined 188,727 newly built apartments will greet their first tenants this year, down 37 percent from 300,401 last year.

Moreover, sluggish real estate sales are prompting more people to opt for jeonse instead of buying. Kim Kyu-jung, a manager at real estate information provider Real Estate 114, said, “More people are turning to jeonse for fear of housing prices falling further.”

Baby boomer landlords changing to the monthly rent system have also caused the supply of jeonse units to decline. One baby boomer landlord in Goyang, Gyeonggi Province, said he waited two months before finding a tenant willing to pay the security deposit of 30 million won (26,800 dollars) and monthly rent of 1.3 million won (1,161 dollars).

“The real estate agency said I could`ve easily found a tenant had I offered jeonse but I wanted monthly rent. I cannot earn much from jeonse under today’s low interest rates,” he said.

A survey of 500 baby boomers by Mirae Asset’s retirement pension think tank found that baby boomers who own a home they do not live in tend to reject jeonse when they turn 50. Seventy percent of those in their 30s and 40s opted for jeonse, but the figure was 50 percent for those in their 50s and 36 percent for those over 60.

In contrast, less than 30 percent of baby boomer landlords offered monthly rent, while the portion of those over 50 was 50 percent. Budongsan 114`s Kim said, “The number of jeonse units has dropped further with landlords preferring monthly rent due to low capital gains from jeonse.”

○ Real estate to create income

As baby boomers turn to monthly rent, fears are rising that the real estate market could collapse due to fewer retirees selling their properties after retirement. This is because baby boomers will seek to earn cash through monthly rent.

Lee Hyun-seok, a real estate professor at Konkuk University in Seoul, said, “Baby boomers are the first retiring generation to have received a proper financial education. Not only do they seek capital gains through rent but they also know how to manage the gains.”

The share of monthly rent in Korea’s rental market is sharply rising. In metropolitan cities excluding the Seoul metropolitan area, the share of jeonse homes fell to 49.1 percent last year from 55.9 percent in 2008 while that of monthly rent homes rose from 41.4 percent to 46.9 percent.

Real estate agent Lee Seok-joon said, “More and more people are inquiring about interest rates on monthly rent. Nearly half of all rental homes now charge monthly rent.”

Baby boomers’ transition to monthly rent is a burden to the younger generation. A 39-year-old man living in southern Seoul rented a house on a monthly rental basis in October last year after the jeonse price of the apartment he had been living in doubled.

“I concluded a monthly rent contract with help from my parents and my in-laws with a security deposit of 50 million won (44,666 dollars) and monthly rent of 500,000 won (446 dollars). My child will soon enter kindergarten and we’re already feeling the burden,” he said.

Experts say the transition to monthly rent can further worsen things for the younger generation, who are supporting senior citizens through pension payments. Baby boomers have accumulated sufficient assets but younger people might not be able to do so partially due to monthly rent.

A 36-year-old office worker said he had no choice but to move into a house with monthly rent because he lacked the jeonse amount of 90 million won (80,400 dollars) as demanded by the landlord. “It`s a burden to pay 500,000 won (446 U.S. dollars) in monthly rent even as a dual-income family. I’ll have to cut eating out expenses,” he said.

tnf@donga.com