[Marginalized Jeonse Tenants]④ Released Jeonse Loans 200 Trillion Won... Tenants' 'Double Burden'

Rising Base Interest Rates Raise Concerns Over Empty Jeonse

Impact of Increased Gap Investments Due to Easy Jeonse Loans

"House Price Uptrend Gamble Makes Jeonse Tenants Unhappy"

[Asia Economy Reporter Song Seung-seop] Kim Jun-ha (23), who lives in Dong-gu, Daegu, signed a jeonse lease contract for an apartment on February 2019 for 370 million KRW. However, the landlord changed within two months. The new landlord bought the house for 470 million KRW by adding a 100 million KRW loan to Kim's jeonse deposit. This was a so-called 'gap investment' aimed at capitalizing on the price difference. At the time, there was no concern due to low interest rates and soaring housing prices, but the situation changed this year. As interest rates rose, the real estate market froze and housing prices fell. Kim, whose contract was about to expire, became anxious about whether he could get his jeonse deposit back on time. When he subtly asked the landlord, the landlord trailed off, saying, "Housing prices are falling, and interest rates have risen a lot in the meantime."

Tenants struggling with jeonse loan interest rates reaching 7% are now suffering double hardship as the real estate market has recently stagnated, even experiencing the fear of 'empty-can jeonse' (Kkangtong Jeonse). The root cause of 'empty-can jeonse,' where there is a high risk of not getting the deposit back, mainly stems from landlords' gap investments. Since 2016, the government and banks have massively expanded jeonse loan availability, which triggered gap investments. The outstanding balance of domestic bank jeonse loans (as of October, according to KB Financial Group's Management Research Institute) is approaching 200 trillion KRW.

Jeonse loans, justified by the need for residential stability for ordinary citizens, have been treated differently from mortgage loans, with both the Park Geun-hye and Moon Jae-in administrations continuously raising limits and easing interest rates. People flocked to the relatively laxly regulated jeonse loans, and banks actively promoted them, causing jeonse prices to rise close to housing prices, which fueled active gap investments.

[Image source=Yonhap News]

Currently, most jeonse loans are executed up to 80-90% of the guarantee amount. Until last year, interest rates were also low. During the COVID-19 period, when the base interest rate dropped to 0.5%, some major commercial banks offered jeonse loans with interest rates in the 1% range. Jeonse loans, which were only about 23 trillion KRW in 2012, sharply increased after 2016, reaching 184 trillion KRW last year. As of last month, the amount reached 193.9 trillion KRW.

The Real Estate Research Team at KB Financial Group's Management Research Institute analyzed in the "Market Change Review Report Due to Increase in Jeonse Loans" that "Jeonse loans not only influence the rise in jeonse prices but also create an environment favorable to gap investments by affecting the increase in jeonse prices." According to data submitted to Rep. Kim Sang-hoon of the People Power Party by the Ministry of Land, Infrastructure and Transport, the ratio of gap investments (transfer of rental deposits upon purchase) to housing purchases in Seoul increased from 14.6% in 2018 to 41.9% in 2021.

Ultimately, the massive expansion of jeonse loans by the government and banks triggered gap investments, which have turned into deposit risks during the period of rising interest rates, causing double distress to tenants already burdened by higher interest rates. Park Won-gap, Senior Real Estate Advisor at KB Kookmin Bank, warned, "Gap investment is fundamentally a risky gamble on upward trends, and it should be understood that tenants also become unhappy."