[Initial Report] How to Prevent the 'July Jeonse Commotion'

Research institutions like Korea Real Estate Board and KB Real Estate send weekly press releases titled ‘Monthly Apartment Market Report’ to their assigned reporters.

However, the titles of these reports have remained similar from the second half of last year until now. ‘Sale prices down by 0.○○% (or stable), Jeonse prices up by 0.○○%.’ Only the digits inside the decimal circles have changed, but the direction of sale and Jeonse prices has hardly shifted within the reports.

In particular, the upward trend in Jeonse prices continued. According to the Seoul Jeonse Price Index change rates surveyed by the Korea Real Estate Board, the figures were 0.7% in November last year, 0.58% in December, and 0.23% in January this year. Although the increase was gradual, it steadily rose. There were two main reasons for the rise in Jeonse prices: the decrease in apartment move-in supply alongside increased preference for Jeonse, and the rise in the number of people holding out with Jeonse as sale prices fell, waiting for a better time. This reflects changes due to supply shortage and increased demand.

However, there is a strong expectation that the slope of the Jeonse price increase curve will steepen starting this July. This is because the expiration of the lease renewal request rights, which began in 2020, is approaching. Landlords who signed Jeonse contracts with tenants in 2020 and renewed contracts in 2022 using the lease renewal request rights have barely been able to raise rents so far. Mixed feelings of frustration from “enduring the past four years” and concerns about “not being able to raise rents for the next four years” may cause new Jeonse prices to jump, centered around these landlords.

The landlord’s mindset is revealed by comparing two Jeonse contracts of the same size (168.42㎡) at Gaepo Xi in November 2021. When the lease renewal request right was used, the deposit was 1.26 billion KRW (16th floor), but when it was not used, the deposit reached 1.4 billion KRW (9th floor). When Jeonse prices suddenly rise like this, tenants’ options are limited to either taking out more bank loans or packing up and moving to a cheaper neighborhood. These are the only two choices.

However, if landlords excessively raise Jeonse prices in anticipation of tenants exercising their lease renewal request rights two years later, landlords themselves could be cornered. After the real estate market falls into a recession, it is not difficult to find apartments where sale prices have dropped to the previous Jeonse price levels or even below. If Jeonse prices are sharply raised now but landlords later lack the capacity to return the deposits, tenants will inevitably suffer from “empty Jeonse” situations.

The Ministry of Land, Infrastructure and Transport must act in advance before the Jeonse price shock arrives. Minister Park Sang-woo of the Ministry of Land, Infrastructure and Transport has also stated that the abolition of the two lease laws should be “approached cautiously,” so currently the focus is on revising and supplementing the lease renewal request rights and the rent ceiling system.

First, the rent increase rate, currently capped at 5%, should be adjusted upward to reflect reality. Although there are concerns that deposits might rise too much, this is preferable to landlords suddenly pushing up deposits and triggering a Jeonse crisis. For tenants, it is necessary to extend the fixed contract period of ‘2+2 years’ to ‘3+1 years’ or ‘3+3 years.’ In this case, if the government provides incentives such as tax reductions to landlords, the process could become much smoother.

Renting is a legitimate commercial act, and even though tenants spend millions of won on brokerage fees and sign contracts, they have always been the ‘weaker party (Eul).’ If the system designed to protect these ‘Eul’ causes them to oscillate between heaven and hell, the hardship of Jeonse living will only deepen. Good intentions must be free of side effects to yield positive outcomes.