[Insight & Opinion] There Is Neither a Jeonse Crisis Nor a Monthly Rent Crisis

Earlier this year, as the lease renewal under the Rental Protection Act approached, the theory of a “Jeonse crisis” causing a sharp rise in Jeonse prices from August gained traction. Since the Rental Protection Act was implemented on August 1 two years ago and Jeonse prices surged during that period, the claim that Jeonse prices would rise again two years later seemed quite convincing.

However, both sale prices and Jeonse prices have been stabilizing and declining as of August. According to data released by the Korea Real Estate Board on the 1st, out of a total of 176 regions nationwide, 118 regions showed a decline, clearly indicating a downward trend.

Where did this forecasting error come from? In fact, the data had already predicted that there would be no Jeonse or monthly rent crisis. If the entire rental market is considered as 100, tenants who raised their rent for new contracts account for 80%, while tenants who extended their contracts at previous prices account for 20%. This 20% raising Jeonse prices cannot be considered a crisis. At most, it could be called a commotion.

However, as the Jeonse crisis theory disappeared in August, the opposite theory of a monthly rent crisis emerged. At first glance, it does seem that way. Actual lease contract data shows that the proportion of pure Jeonse contracts, where the entire deposit is Jeonse, is decreasing, while the proportions of semi-Jeonse, semi-monthly rent, or pure monthly rent contracts are increasing.

According to the Seoul City Information Plaza, the monthly rent ratio was 31% in August 2020, but as of June this year, it has risen to 43%, indicating that contracts mixing some monthly rent are becoming more common. However, the rent levels for both Jeonse and monthly rent began to decline from the peak at the end of 2021. Therefore, the monthly rent crisis theory is also close to an overreaction.

So, is it correct to view the “monthly rent-ification of Jeonse” as a monthly rent crisis? This change is largely influenced by market interest rates. After the Bank of Korea’s successive base rate hikes this year, monthly rent has become a more affordable housing option.

For example, in the case of a Jeonse deposit of 500 million KRW, in the past, one could live by using 100 million KRW of their own capital and borrowing 400 million KRW. Assuming a loan interest rate of 3%, the monthly interest burden was 1 million KRW. However, due to the recent interest rate hikes, the effective interest rate is about 5%, meaning an annual interest payment of 20 million KRW.

On the other hand, if the Jeonse deposit is converted into monthly rent, the market interest rate is about 350,000 to 400,000 KRW per 100 million KRW. So, at 350,000 KRW per 100 million KRW, the monthly rent is 1.2 million KRW, and at 400,000 KRW, it is 1.6 million KRW, both slightly cheaper than borrowing at a 5% interest rate.

Therefore, this conversion is not a crisis but a natural shift toward lower housing costs. It should be distinguished from a market-wide monthly rent crisis. Jeonse has provided a win-win structure for both tenants, who enjoyed affordable housing, and landlords, who used it as an interest-free leverage, but that structure has now been broken.

Of course, this phenomenon occurs when Jeonse loan interest rates are higher than the market’s Jeonse-to-monthly rent conversion rate and may not last long. There is no guarantee that the market will prefer 100% monthly rent, and landlords will be unable to use leverage as the Jeonse deposit amount decreases.

In any case, due to these changes, the second half of 2022, filled with Jeonse crisis theories, is passing by. Stabilization of Jeonse prices is a very important factor for housing price stability, and interest rates are playing a major role in this.

Chaesangwook, CEO of Forcommas