Decrease in Jeonse Deposit Insurance Limit → Acceleration of Jeonse to Monthly Rent
"Insurance Nullification, Increased Hardship for Homeless"
#Junghyun Joo (29, pseudonym), an office worker living in Seoul, recently went out to find a jeonse (long-term lease) but ended up having to consider a banjeonse (half-jeonse) due to the landlord's sudden notice. Just before signing the contract, the landlord contacted Mr. Joo and said, "The official property price has dropped, reducing the limit for subscribing to the Jeonse Deposit Return Guarantee Insurance (Jeonse Guarantee Insurance)." The landlord requested, "Please accept the jeonse deposit only up to the insurance subscription limit and convert the difference into monthly rent." The banjeonse terms were a deposit of about 260 million KRW and a monthly rent of 70,000 KRW. The contract was not a heavy burden for Mr. Joo, but he lost sleep over whether he would have to live with monthly rent, which was not part of his plan.
Recently, as the official property prices of affordable housing such as officetels and villas (multi-family and row houses) have declined, tenants like Mr. Joo face growing concerns. They are confronted with situations where they must either give up full protection of their jeonse deposit through guarantee insurance or sign contracts under banjeonse conditions. Given the high likelihood of further declines in officetel and villa official prices due to the aftermath of jeonse fraud, it is expected that the housing cost burden for non-apartment jeonse tenants will increase.
Officetel Official Price Falls 5%... Villa Price Increase Rate Also Declines
According to the National Tax Service on the 26th, the standard official price of officetels nationwide fell by 4.77% compared to last year. This is the first drop in 19 years since the officetel official price was first announced in 2005. The decline is attributed to the high interest rate environment, prolonged real estate market downturn, and the jeonse fraud incident last year, which caused sales prices to fall. While apartments and other multi-family housing follow official property prices, officetels and commercial real estate follow the standard official price separately determined and announced by the head of the National Tax Service.
The situation is similar for villas, another affordable housing ladder. According to the Ministry of Land, Infrastructure and Transport, the official property price (draft) for multi-family housing, including villas and apartments, slightly increased this year. It rose by an average of 1.52% compared to last year. This is the sixth lowest rate of change since the multi-family housing official price system was first introduced in 2005 and the third lowest in absolute terms. The official price is calculated by multiplying the sales price by the official price realization rate (69% for multi-family housing). When sales prices rise, official prices rise; when sales prices fall, official prices also decline.
The decline in villa sales prices due to last year's jeonse fraud and "empty jeonse" cases is analyzed to have affected the overall official price. For example, a villa (290-20) in Juan-dong, Michuhol-gu, Incheon, where jeonse fraud was rampant, saw its official price drop from 142 million KRW last year to 136 million KRW this year, a 4.2% (6 million KRW) decrease. A villa (397-3) in Hwagok-dong, Gangseo-gu, Seoul, saw its official price fall from 110 million KRW last year to 107 million KRW this year, a 2.7% (3 million KRW) decrease, and a villa (530-15) in Sinwol-dong, Yangcheon-gu, also dropped from 208 million KRW to 205 million KRW, a 1.5% (3 million KRW) decrease during the same period.
Jeonse Guarantee Insurance Limit Calculated Based on Official Price
When official property prices fall, the guarantee limit of Jeonse Guarantee Insurance decreases. The insurance limit is set based on the official price. Last year, to prevent jeonse fraud, the government lowered the subscription requirement for the Housing and Urban Guarantee Corporation (HUG) Jeonse Guarantee Insurance for villas from a jeonse rate (ratio of jeonse price to sales price) of 100% or less to 90% or less. Additionally, the official price application rate for housing price calculation was reduced from 150% to 140%, making it possible to subscribe to Jeonse Guarantee Insurance only up to 126% of the official price (official price application rate 140% × jeonse rate 90%).
As the insurance limit decreases, landlords face situations where they must reduce the jeonse deposit. To maintain the existing jeonse deposit or receive more in line with market prices, landlords must convert the amount exceeding the insurance limit into monthly rent.
Landlords Convert Additional Amount Beyond Insurance Limit into Monthly Rent to Maintain Jeonse Deposit
The number of such landlords is expected to increase further. Recently, the government announced plans to scrap the official price realization plan, which may widen the gap between official prices and market prices. Professor Daejung Kwon of the Department of Real Estate at Sogang University explained, "If villa official prices fall or are undervalued, tenants may be disadvantaged. New tenants may contract at lower jeonse prices than existing ones, leading to situations where existing tenants' jeonse deposits are not protected."
Housing cost burdens may also increase. Professor Kwon said, "Landlords can accept deposits only up to the insurance limit and convert the remaining deposit into monthly rent. Since monthly rent is consumptive, tenants' disposable income decreases accordingly."
This downward trend in non-apartment official prices is expected to accelerate the conversion of jeonse tenants to monthly rent. Real estate specialist Soomin Yoon of NH Nonghyup Bank analyzed, "Monthly rent conversion is already progressing rapidly in the villa market, and the decline in official prices is accelerating this trend. The gap between market prices and official prices is becoming a new standard in the form of monthly rent conversion."
Professor Mando Han of the Department of Real Estate at Seoul Digital University emphasized, "As official prices fall, the effectiveness of Jeonse Guarantee Insurance decreases, and the housing environment for non-homeowners may deteriorate, so measures need to be prepared."
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