[News Terms] The '126% Rule' Shaking Up the Villa Jeonse Market

One of the measures to prevent jeonse fraud, the ‘126% rule,’ limits the subscription to the Jeonse deposit return guarantee insurance by the Housing and Urban Guarantee Corporation (HUG) to up to 126% of the publicly announced property price.

Villa complex in the Huam-dong area of Yongsan-gu, Seoul. [Image source=Yonhap News]

The Jeonse deposit return guarantee insurance is a system where HUG reimburses the tenant if the landlord fails to return the deposit and later recovers the amount from the landlord. Based on the jeonse price, this product can be subscribed to if the price is 700 million KRW or less in the metropolitan area and 500 million KRW or less in other regions. By subscribing to this product, HUG takes responsibility for returning the Jeonse deposit, so even if the tenant falls victim to Jeonse fraud, they can protect their deposit.

Last year, when large-scale Jeonse fraud occurred, the government strengthened the housing price assessment criteria for subscribing to HUG’s Jeonse deposit return guarantee insurance by lowering the application ratio of the publicly announced price from 150% to 140% and adjusting the Jeonse rate (the ratio of Jeonse price to house price) from 100% or less to 90% or less. Accordingly, the limit of the Jeonse deposit return guarantee insurance was lowered from ‘150%’ to ‘126%’ of the publicly announced price.

Take Villa A, which is priced at 150 million KRW according to the publicly announced price, as an example. Calculating the insurance limit for this villa under the previous regulation would result in a subscription ceiling of 225 million KRW based on the formula ‘150 million KRW × 150% × 100%.’ However, applying the revised regulation lowers the ceiling to 189 million KRW, which is 126% of the publicly announced price (150 million KRW × 140% × 90%). This means that the guarantee for Villa A, which could previously be insured up to 225 million KRW, is now only possible if it is 189 million KRW or less. Since HUG’s return guarantee subscription ceiling is generally perceived as the ‘Jeonse price ceiling,’ this can also be interpreted as the maximum Jeonse price for Villa A being lowered to 189 million KRW.

If the Jeonse price ceiling is lowered, there is an advantage for tenants in that their Jeonse burden decreases. Also, since it is a product subscribed to guarantee insurance, there is no worry about losing the Jeonse deposit. However, the problem is that since the price eligible for HUG’s return guarantee subscription becomes the upper limit of the Jeonse price for the property, it has become practically difficult for tenants who subscribed to the guarantee product at 150% of the previous publicly announced price last May to renew their contracts. This is because a new guarantee cannot be obtained unless the landlord lowers the Jeonse price. In particular, in a situation where the guarantee ceiling inevitably becomes lower than before unless the publicly announced price rises significantly, the guarantee limit has further decreased as most villa publicly announced prices fell this year. This has led to increased fear that landlords may not be able to return the deposit to existing tenants even if they find new tenants, further intensifying the avoidance of villas.

As these problems arose due to the strengthened subscription requirements for Jeonse guarantee insurance, the government decided to use the appraisal value recognized by HUG along with the publicly announced price as the housing price assessment standard for villa Jeonse deposit return guarantees. According to the plan to revise the subscription criteria for Jeonse and rental guarantee insurance announced by the Ministry of Land, Infrastructure and Transport on the 13th as part of the ‘Follow-up Regulatory Improvement Measures after the Public Discussion on Livelihood,’ the existing ‘126% rule’ will be maintained, but if the landlord files an objection claiming that the publicly announced price is excessively low compared to the house price and HUG acknowledges the objection, the appraisal value can be applied to assess the house price.