[Loan Market Stirring]② Row Houses and Multi-family Units 'Jeonse Phobia' Dispelled... 60% 'Jeonse' with Loans at 3% Interest Rates

The interest rates on jeonse (long-term lease) loans in the banking sector, which once approached the 7% range, have rapidly dropped to the low to mid-3% range, causing the jeonse market to show signs of stirring. However, the industry believes that a shift to an upward trend will not be easy due to ongoing issues such as reverse jeonse and jeonse fraud, as well as the steady accumulation of jeonse demand following last year's sharp base rate hikes.

According to the financial sector on the 18th, K-Bank lowered its jeonse loan interest rates by 0.14 to 0.15 percentage points starting that day. As a result, K-Bank's general jeonse loan interest rates now range from 3.32% to 6.12% per annum, while youth jeonse loan rates are between 3.31% and 3.81% per annum. The fixed-rate jeonse loan interest rate is also at a single rate of 3.71%. The lower bound of jeonse loan interest rates has thus fallen to the low 3% range.

The lower bound of jeonse loan interest rates at commercial banks is also approaching the 3% range. As of the 16th, the average interest rates for jeonse loans at the four major domestic commercial banks (KB Kookmin, Shinhan, Hana, and Woori) were recorded at 3.56% to 4.56% per annum based on the COFIX (Cost of Funds Index) for new loans. This contrasts with the end of last year when the upper bound was around 6-7% and the lower bound nearly 4-5%.

[Image source=Yonhap News]

The decline in jeonse loan interest rates is due to government pressure to lower rates and the stabilization of benchmark market rates such as COFIX and financial bonds amid falling market interest rates. The COFIX for new loans rose to 4.34% in November last year but has since rapidly declined to 3.44% last month, dropping 90 basis points (1bp=0.01%) in half a year. The 6-month bank bond rate (AAA grade) also fell nearly 100 basis points from its peak of 4.682% in mid-November last year to 3.700% as of the 17th.

As loan interest rates stabilize quickly, the decrease in jeonse loans is narrowing. According to the Bank of Korea, the reduction in jeonse loans by domestic banks shrank from 2.5 trillion KRW in February to 2.3 trillion KRW in March, and further to 1.7 trillion KRW last month.

The proportion of jeonse contracts in lease agreements is also surpassing monthly rent again. According to the Seoul Real Estate Information Plaza, the total number of apartment lease contracts last month was 18,260, with jeonse accounting for nearly 62.0% (11,328 contracts). Considering that the jeonse proportion was only 47.7% in December last year, this is interpreted as an effect of lower prices and interest rates.

The share of jeonse contracts in multi-family and row houses in the Seoul metropolitan area, the epicenter of recent 'jeonse phobia,' is also on the rise. According to a survey by the real estate platform Zigbang based on the Ministry of Land, Infrastructure and Transport's actual transaction price report data, the proportion of jeonse transactions for multi-family and row houses in Seoul was 49.7% in December last year, falling short of monthly rent, but has reversed this year and rose to 60.2% last month.

However, experts remain cautious about whether this trend will lead to a full-scale expansion of jeonse demand. A financial sector official said, "It seems that the jeonse demand accumulated due to last year's sharp rate hikes is partially returning due to the decline in market interest rates," adding, "Since challenges such as reverse jeonse remain, it is necessary to observe the market situation a bit longer."

Min Byung-chul, a research fellow at the Housing Finance Research Institute, said, "With the monthly rent to jeonse conversion rate at around 6-7% and loan interest rates lowered to 3-4%, more tenants are choosing jeonse over monthly rent to save on housing costs," but also noted, "Compared to apartments with relatively low jeonse ratios, the villa market, including multi-family and row houses, requires a cautious approach."