[Inside Chodong] The Jeonse System Undermined by Gap Investment

The jeonse system, which has served as a stepping stone for homeownership, is now being shaken. The ‘gap investment’ (purchasing a house including the jeonse deposit), which flourished during the housing price surge until two years ago, has led to problems such as jeonse fraud, reverse jeonse crises, and “empty shell” jeonse amid the housing price decline. These issues arose as gap investors, who viewed houses not as places to live but as investment assets, exploited the jeonse system.

In fact, gap investment can be seen as a product of government policies. Until the mid-2000s, the government did not intervene in jeonse financing. Loans were issued through private banks’ own products after strict screening. However, as rising jeonse prices became a problem for housing policies aimed at ordinary citizens, the government introduced a simplistic solution: jeonse loan programs. Coupled with populist housing policies, especially excessive jeonse loan issuance, this laid the groundwork for the current problems caused by gap investment. The government’s jeonse loan, first introduced in 2008, increased its limit from 100 million KRW to 200 million KRW the following year, and by 2015, it was raised to a maximum of 500 million KRW (through Seoul Guarantee Insurance products).

As a result, gap investment became popular as a means of asset accumulation during the housing price surge from 2018 to 2021. The proportion of gap investment among all apartment sales in Seoul rose sharply from about 14% in 2017 to 43% in 2021. Jeonse loans also surged, increasing from 48.6 trillion KRW at the end of 2017 to 170 trillion KRW in 2021.

It has been openly pointed out for several years that jeonse loans are one of the main causes of the real estate market bubble. However, the government, mindful of public opinion, refrained from intervening. This was largely because jeonse loans were strongly perceived as support for ordinary citizens. While the government hesitated, jeonse loans were ultimately exploited as a tool for gap investment.

The current jeonse system has long been distorted by gap investment, increasing volatility rather than housing stability. Excessive leveraged investment has heightened financial market risks, ultimately causing both jeonse and sale prices to rise, resulting in a bubble in the real estate market.

Some have argued for a gradual reform of the jeonse system from both short- and long-term perspectives over the past few years. According to a report published by the Korea Research Institute for Human Settlements in 2015, scholars have mentioned the need to strengthen regulations on jeonse loans and guarantee insurance, while also pointing out the necessity for fundamental reconsideration of the jeonse system in the long term.

It seems the government is also contemplating reforms to the jeonse system. Won Hee-ryong, Minister of Land, Infrastructure and Transport, hinted at adjustments to the jeonse system, directly mentioning the eradication of gap investment by stating, “We will prevent people from buying multiple houses by leveraging jeonse deposits.” However, no concrete measures have been announced yet. He only mentioned that they are “considering ways to maximize tenants’ rights to secure their deposits.”

Reforming the jeonse system, which has long served as a housing ladder, is a sensitive issue. Even policies introduced with good intentions, such as jeonse loans, can cause problems that undermine their purpose if institutional loopholes exist, as seen with gap investment. Especially since jeonse issues are directly linked to the housing of ordinary citizens, in-depth and systematic policy design that respects market mechanisms rather than political logic will be necessary.