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Time to prepare for a shift from jeonse to monthly rent

Posted August. 12, 2013 06:37,   


During what would normally be a summer holiday lull in the real estate market, apartment jeonse prices (a rental fee based on a lump-sum deposit) have risen for the 50th consecutive week. Northern Seoul Hyochang-dong`s 84m² apartments saw their jeonse price surge 48 percent to 400 million won (359,874 U.S. dollars) this year from 270 million (242,914 dollars) in 2011. In Gwangju City and Gangwon Province, some jeonse prices are higher than housing prices. In short, jeonse prices are going crazy. It is almost impossible to find jeonse apartments, and 20-30 people are paying advanced money to real estate agencies to wait for available jeonse homes.

Low interest rates have prompted house owners to prefer monthly rent over jeonse, which has led to jeonse shortage. Monthly rent prices are currently formed at 4.5 percent of the housing prices, and owners can make double returns from monthly rent compared with bank deposit rates. This is why more home owners want monthly rent. With housing prices remaining in the doldrums, people are also delaying home purchases and instead turning to jeonse.

The government`s missteps are also blamed for the jeonse price surge and shortage in the past three years. The government increased jeonse loan support for renters, and launched a system that enables home owners take out mortgage loans for the renters and collect interests from them. However, as jeonse loans increased, more people are delaying buying a house. With jeonse prices surging, it remains a question whether homeowners would take out loans for renters.

A unique Korean rental system, jeonse has been deemed convenient but is likely to shift to monthly rent in the longer term due to falling housing prices and low interest rates. According to the Land and Transportation Ministry`s residence survey, the share of jeonse nationwide was 21.7 percent while monthly rent was 21.6 percent. Half-jeonse, based on smaller deposit sums balanced with monthly rents, is also increasing. To this end, the government needs to reorganize the renter support system from jeonse-focus to monthly rent. For example, instead of increasing jeonse loans, the income tax deduction for monthly rent should be raised. Acquisition tax should be cut while transfer tax for multi-homeowners should be abolished, to turn jeonse demand to purchase demand.

In order to enable a soft landing of this jeonse-to monthly rent shift by preventing drastic fall in jeonse and surge in monthly rent, the public rental house measure should also be reconsidered. The current monthly rent focused public rental houses should be more allocated to jeonse, and lease houses should be supplied not only to those in poverty but also to more affordable low-income people. Homeowners who put their home on jeonse should be given tax deductions, and monthly rent income should be transparently taxed. The jeonse shortage will worsen in autumn moving season. The perception that jeonse price surge is local should be eliminated.