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Reverse jeonse dangers could amplify in H2

Posted June. 03, 2023 08:28,   

Updated June. 03, 2023 08:28


Amidst the growing issue of jeonse fraud and its detrimental effects, efforts have been made to address tenants' concerns by implementing supportive laws. However, emerging analysis suggests that the “reverse jeonse crisis,” triggered by a decline in jeonse prices, is only in its early stages. Almost half of the global apartment contracts signed this year involved landlords compensating tenants for a decrease in jeonse prices. The situation is particularly severe for provincial apartments and newly constructed villas, where rental prices have experienced a significant decline.

The Dong-A Ilbo team conducted a thorough comparison and analysis of apartment jeonse contracts nationwide between January and April of this year, comparing them to the same period two years ago. The findings revealed that in 47% of the cases, the rental prices had decreased compared to two years ago. Consequently, landlords had to compensate tenants for the decrease, resulting in a total payment of 2.5 trillion won, averaging around 84 million won per unit. While some landlords may find temporary relief by obtaining loans, a growing number of tenants are finding themselves trapped as landlords cannot pay them back.

The situation is even more severe for rural apartments, particularly in Daegu and Sejong, where a staggering 82% and 67% of apartments, respectively, have experienced a decrease in rental prices compared to two years ago. Newly built villas have also been significantly affected, with rental prices plummeting due to the jeonse fraud. Eight out of ten new villas across the country, whose jeonse periods end in the second half of this year, are valued at an excessive rate compared to the housing market prices, which would make them face challenges in qualifying for the housing city guarantee corporation (HUG) jeonse refund guarantee program.

Furthermore, starting from August this year, there is a significant likelihood of a “reverse jeonse tsunami” where conflicts between landlords and tenants arise regarding the return of deposits. This situation arises as the contracts signed nationwide, at inflated prices following the revision of the Lease Act in July 2020, reach their maturity. The Bank of Korea has estimated that, as of April, approximately 1,026,000 households across the nation are at risk of reverse jeonse rentals. Of these, 290,000 units are set to expire in the second half of this year, while 316,000 units will reach maturity in the first half of next year. Consequently, landlords may be obligated to pay tens of trillions of won solely due to decreased jeonse prices. This will likely lead to an increase in the number of tenants who struggle to retrieve their deposits on time and a rise in the number of landlords facing property auctions.

To prevent the potential collapse of the economy and chaos in the rental market, it is imperative to expand loans that enable landlords to repay the decrease in deposits. To facilitate this, it is crucial to consider relaxing regulations on the total debt savings ratio (DSR) and loan-to-value ratio (LTV) if the purpose is to repay the jeonse deposit. However, it is essential to exercise cautious supervision by financial authorities to prevent a sudden surge in household loans, which have only recently been stabilized, and to mitigate the risk of increased insolvency among financial institutions.