[Why&Next] Is the 3-year Jeonse under the Bun-sang-je system?..."Specify it as a special clause"

13-Month Delay '3-Year Grace Period for Actual Residence Obligation'
Expected to Be Implemented After Mid-Next Month Following National Assembly Plenary Session
Confusion Due to 3-Year Grace Period Despite 2-Year Jeonse Contract

Homeowners who find it difficult to move into newly built apartments subject to the price ceiling system can now lease their units on a jeonse (long-term lease) basis, gaining three years to prepare. This means they do not have to take on excessive final payment loans. At the same time, tenants planning to live in these apartments under jeonse leases must carefully determine whether they can stay for only two years before the contract or if longer stays are possible. This change comes as the 'Housing Act Amendment,' which postpones the mandatory residence period for apartments under the price ceiling system by three years, was passed by the Land Law Subcommittee on the 21st, and will take effect as early as next month.

Seoul Gangdong-gu Olympic Park Foreon (Dunchon Jugong Reconstruction) view / Photo by Yonhap News

Three-Year Postponement of Mandatory Residence for Price Ceiling Apartments

The passage of this amendment comes about one year and one month after the government announced the abolition of the mandatory residence requirement in January last year. The amendment is expected to pass the full Land, Infrastructure and Transport Committee meeting this week and clear the plenary session hurdle on the 29th. Industry insiders expect the system to be implemented around mid-next month.

The mandatory residence requirement was introduced in February 2021 to curb 'gap speculation.' At that time, the Moon Jae-in administration, facing an overheated real estate market, required winners of housing lotteries for apartments under the metropolitan area price ceiling system and in speculative overheating districts to reside in their units for 2 to 5 years from the move-in date.

However, as the housing market cooled from the second half of 2022, the Yoon Suk-yeol administration announced the abolition of the mandatory residence requirement along with easing restrictions on resale of apartment pre-sale rights in the January 3rd measures last year. Nevertheless, due to opposition party concerns that gap speculation might be encouraged again, the amendment stalled in the National Assembly for over a year. A compromise was reached on the 21st, about 50 days before the general election.

[Image source=Yonhap News]

Expected Contribution to Jeonse Price Stabilization

Before the amendment passed, the ruling party considered postponing the mandatory residence requirement for four years, taking into account tenants' right to request contract renewal. However, the opposition party insisted on maintaining the essence of the regulation and judged that three years would be appropriate considering moving and preparation periods. With the amendment passing based on the opposition party's proposal, homeowners will now be able to lease their units to tenants once before moving in.

The market has responded that the urgent issue has been addressed. According to the Ministry of Land, Infrastructure and Transport, as of the end of January, there are 77 complexes subject to the mandatory residence requirement, totaling approximately 49,766 households. Among them, 11 complexes with 6,544 households have already started move-ins. Olympic Park Foret on the east side of Seoul's Gangdong-gu (Dunchon Jugong Reconstruction, 12,032 households), considered the largest reconstruction project since the founding of Korea, is scheduled for move-in this November. Although resale restrictions were lifted on December 15 last year, rental transactions had been blocked due to the mandatory residence regulation.

A local real estate agent said, "The atmosphere was heavy as the move-in date was brought forward by about two months amid uncertainty over the abolition of the mandatory residence requirement, but with the decision to postpone it for three years, we are receiving inquiries about listing units for jeonse or monthly rent. There is high interest in what the market price will be." Conservative estimates place the jeonse price for an 84㎡ unit at around 700 to 800 million KRW.

With Seoul apartment jeonse prices rising for 39 consecutive weeks, expectations for price stabilization are growing. Since these are jeonse units with limited contract renewal options, asking prices may drop further. In fact, Gangdong-gu, where many move-in units are concentrated, is the only one among Seoul's 25 districts to have seen jeonse prices decline for two consecutive weeks.

Typical Jeonse Contract Period is Two Years, But...

However, some foresee various conflicts arising after the three-year postponement of the mandatory residence requirement expires. Ham Young-jin, head of the Zigbang Big Data Lab, said, "With the three-year postponement, tenants may find it difficult to renew contracts, and considering issues like tacit renewal, conflicts may arise upon eviction unless tenants and landlords create 'special agreements' in advance." He emphasized, "Special agreements should consider the landlord's priority to move in for residence," and stressed the need to clearly specify the possible residence period as two or three years in jeonse contracts for apartments under the price ceiling system.

Additionally, unavoidable circumstances such as landlords being transferred for work or situations where the final payment for the apartment was covered by the jeonse deposit but the tenant vacates early could lead to difficulties in obtaining loans. Most cases involve loans to return the jeonse deposit, but it is unclear how the Debt Service Ratio (DSR) will be adjusted, and economic conditions may also be a variable. Amid concerns about reverse jeonse difficulties, since July last year, loans for jeonse deposit returns have been subject to a relatively relaxed Debt-to-Income (DTI) ratio of 60%, compared to DSR, but this is temporary.

Lee Eun-hyung, a research fellow at the Korea Institute of Construction Policy, said, "While the current situation yields positive results, it is a stopgap measure. Even if homeowners covered the final payment by leasing on jeonse due to lack of funds, it is unlikely they will be able to save that amount of money over three years." He explained, "Ultimately, it is more desirable to either abolish the mandatory residence requirement as per government policy or ensure compliance with the residence obligation until the property is sold."