Bank of Korea Financial Stability Report
Concerns have been raised that if the decline in jeonse prices intensifies due to the real estate market downturn, the increased burden on landlords to return jeonse deposits could exacerbate liquidity and credit risks. The Bank of Korea estimated that if jeonse prices fall by 10%, 3.7% of landlords would find it difficult to return the deposits to tenants.
On the 22nd, the Bank of Korea analyzed the impact of recent changes in the housing lease market conditions on household loan soundness through its Financial Stability Report. According to the report, while housing jeonse prices have been declining since June with the rate of decline continuing to widen, monthly rents have been steadily rising.
Although a drop in jeonse prices can have positive effects such as reducing the financial burden on actual demand tenants and decreasing incentives for gap investment, a sharp decline in jeonse prices over a short period could increase landlords' burden to return jeonse deposits, causing harm to both landlords and tenants.
Using last year's Household Financial Welfare Survey, the Bank of Korea analyzed landlords' ability to return deposits under various jeonse price decline scenarios. It estimated that when jeonse deposits fall by 10%, 85.1% of jeonse landlords could cover the decrease by liquidating financial assets alone, and 11.2% could manage it by liquidating financial assets combined with borrowing from financial institutions.
However, 3.7% of landlords were found to have difficulty securing the amount needed to return the reduced jeonse deposits to tenants even after liquidating financial assets and taking additional loans. The average shortfall per landlord household was approximately 30 million KRW.
Additionally, the Bank of Korea pointed out that the recent increase in demand to convert jeonse contracts to monthly rent due to rising interest burdens on jeonse loans could increase upward pressure on monthly rents, thereby exacerbating the housing cost burden for existing monthly rent tenants.
The Bank of Korea explained that the recent slowdown in real estate demand and price declines could contribute to mitigating the accumulation of household debt by slowing the growth rate of loans through the promotion of repayment of existing jeonse loans.
The Bank of Korea emphasized, "Overall, landlords' ability to return deposits is sound, so the negative impact on financial system stability is expected to be limited," but added, "It is necessary to remain cautious about these risks as expectations of housing price declines persist."
Regarding the government's efforts to ease regulations on mortgage loans for the purpose of returning tenants' deposits to reduce landlords' burdens, the Bank of Korea stated that vigilance is required.
The Bank of Korea added, "It is also necessary to consider applying some total debt service ratio (DSR) regulations to jeonse loans to prevent them from being used as gap investment funds by landlords."
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