[Insight & Opinion] Anti-Jeonse Fraud Measures That Cause Jeonse Fraud

The Ministry of Land, Infrastructure and Transport recently revealed a story through a YouTube video about a pregnant newlywed couple whose jeonse deposit was fraudulently taken. Jeonse fraud is an issue that should never be taken lightly, as it can wipe out an entire family's life savings. Rather, it is time to examine whether such jeonse fraud is being further exacerbated by government policies and systems.

First, there is the Korea Housing & Urban Guarantee Corporation’s (HUG) “150% Officially Announced Price Safe Jeonse Guarantee.” This system is considered one of the causes that amplify fraud damage. Typically, when the jeonse price is higher than the sale price, it is called a “Kkangtong Jeonse” (empty can jeonse). Are tenants foolish for paying a jeonse price higher than the sale price? Not at all. The 150% Officially Announced Price Safe Jeonse Guarantee system is a major reason.

In the case of newly built villas, it is difficult to measure the jeonse market price, so this system recognizes jeonse deposits up to 1.5 times the officially announced price as acceptable. Fraudsters exploit this system. For example, if a newly built villa has an officially announced price appraised at 200 million KRW, HUG presents the figure of 300 million KRW (150%) as a safe jeonse price for that property. Tenants can purchase jeonse guarantee insurance for deposits up to 300 million KRW. Even if the market price is 280 million KRW, a 300 million KRW jeonse is possible because of HUG’s policy.

Since August last year, there has been a strong correlation between jeonse fraud and this system, and multiple media reports have noted that in most villas in Seoul, 150% of the officially announced price exceeds the sale price. However, the government only lowered the 150% threshold to 140% in its September last year jeonse fraud prevention measures. While 300 million KRW is no longer considered safe, 280 million KRW still qualifies for the safe jeonse guarantee?so is it truly safe? The government’s main countermeasure is to use a recommendation system from the Appraisers Association, fearing that even appraisals might be exploited for fraud. It is doubtful whether this can be an effective remedy.

We also need to examine bank jeonse loans. It was announced that the total jeonse deposit in Korea is 854 trillion KRW, and the total jeonse loan amount is 190 trillion KRW. This means that 20% of the total jeonse deposit is financed through loans.

Jeonse originated in the 1970s when homebuyers could not obtain purchase funds through financial institutions, and investors who bought multiple houses began using tenants’ deposits. Since 2000, commercial banks have allowed mortgage loans, which led to a 30% increase in sale prices. While measures related to sale prices were continuously introduced due to the rapid rise in housing prices, jeonse, being a rental system, faced fewer regulations.

The jeonse loan system became more active during the Lee Myung-bak administration. At that time, to address difficulties tenants faced in raising jeonse deposits, loans became easier to obtain, which fueled a significant rise in jeonse prices and led to an era where gap investment became easier. In the late 2010s, both jeonse loans and mortgage loans surged, and society is now experiencing the aftermath. It may be time to reconsider whether the jeonse loan system is still necessary by gathering opinions from various experts and consumers.

It is also time to rethink the role of banks, which have remained somewhat detached from the jeonse fraud controversy. Banks provide jeonse loans, but HUG guarantees them, so banks face no risk. Meanwhile, interest income increases as jeonse loans grow. This position?no risk but increasing profits as the market expands?feels somewhat incongruous. In cases of jeonse fraud, the clear beneficiaries are the fraudsters, while the victims are tenants and HUG. So where do banks stand, and which side are they closer to?

Government policies and systems influence the market, and the market operates within those rules. It is hoped that the fundamental principles for preventing jeonse fraud will be reexamined from the ground up and lead to fundamental countermeasures.