"Jeonse Prices Up 20% Compared to 4 Years Ago... Concerns Over Reverse Jeonse Next Year" [Impact of Lease 2 Laws]

Interview with Kim Hyoseon, NH Nonghyup Senior Real Estate Specialist

After the Implementation of the Two Lease Laws
Analysis of Jeonse Prices in Major Seoul Apartments Over Four Years

Seoul apartment jeonse prices are soaring. They have risen continuously for 62 weeks since May last year. The main cause of the price increase was the shortage of new apartment supply. The influx of people into apartment jeonse after villa jeonse fraud also played a role. As jeonse prices jumped, more people decided to buy houses instead, pushing up sale prices as well.

There is growing interest in whether this trend will continue in the second half of this year. Last month on the 31st marked the 4th anniversary of the implementation of the two lease laws (the right to request contract renewal and the rent ceiling system). Kim Hyoseon, Senior Real Estate Specialist at NH Nonghyup, predicted that jeonse prices would continue to rise based on an analysis of jeonse prices in major large apartment complexes in Seoul.

On the 30th, Kim Hyo-seon, Senior Real Estate Specialist at NH Nonghyup Bank, is being interviewed by Asia Economy at the Seoul Seodaemun office. Photo by Jo Yong-jun jun21@

How Much Have Seoul Jeonse Prices Risen Compared to 4 Years Ago?

"People who signed new jeonse contracts for Seoul apartments in 2020 will be signing new contracts this year after 4 years. If they renew the contract for the same apartment, they will have to pay about 15-20% more in jeonse price."

As Kim’s analysis suggests, jeonse prices in major complexes in Seoul have risen compared to 4 years ago. Based on the median price for 84㎡ exclusive area (median when sorted by size), Cheonggu 3rd Complex in Nowon-gu rose from 570 million KRW to 700 million KRW, and Tens Hill in Seongdong-gu rose from 750 million KRW to 880 million KRW.

Even outside major complexes, depending on location and condition, some tenants have to pay at least 100 million KRW and up to 300 million KRW more. If these households take additional loans to cover the increased jeonse prices, they will have to spend an extra 400,000 to 500,000 KRW per month repaying bank debt.

Due to the two lease laws, jeonse prices are likely to rise further in the second half of the year. Looking at 2021, the year after the laws were implemented, the deposit for new contracts rose sharply compared to renewed contracts. Kim explained, "In 2021, the deposit for new contracts was about 40% higher than for renewed contracts," adding, "Landlords raised prices significantly in anticipation that they could not increase rents after two years due to the right to request contract renewal."

‘Reverse Jeonse’ Crisis Could Occur Next Year

Kim warned, "Even if jeonse prices rise more next year than this year, if they remain below the historic peak in 2021, the ‘reverse jeonse’ problem will arise."

Reverse jeonse refers to a situation where the jeonse price at the time of contract renewal is lower than the previous contract. In this case, landlords have to return money to the tenant when renewing the contract with the same tenant. The same applies when finding a new tenant. Since the jeonse price has already dropped, landlords must find additional funds to return the previously received deposit.

Over the past 20 years, the average annual increase rate of Seoul apartment jeonse prices was about 3%. Assuming jeonse prices rise by this amount next year, the 2025 jeonse deposit is likely to be only 85-90% of the 2021 level. For example, Cheonggu 3rd Complex, which recorded 840 million KRW in 2021, is estimated to have a jeonse price of 721 million KRW next year. Based on this, landlords would have to return 119 million KRW to tenants whose 4-year (2 years + 2 years) contracts have ended. Tens Hill landlords would have to pay back 123.6 million KRW, and Banpo Xi landlords 255 million KRW.

The higher the price, the larger the amount landlords must return. If landlords lack spare funds, they must either take out loans or put their houses on the market. Increasing the deposit is another option, but this causes further side effects of jeonse price increases.

Kim said, "If Seoul apartment jeonse prices surge until the second half of this year to levels similar to or higher than 2021, concerns about reverse jeonse may disappear," but added, "However, the two lease laws were introduced to guarantee jeonse price stability for 4 years, so it is ironic if tenants still have to pay record-high jeonse prices after one full cycle."

If Switching from Jeonse to Purchase, House Prices Will Rise

[Image source=Yonhap News]

If the jeonse price rise continues until next year, sale prices may also keep rising. This is because the gap between 2021 jeonse prices and current sale prices is not large. The highest jeonse price for Cheonggu 3rd Complex in 2021 reached 1 billion KRW. Currently, the sale price of this apartment is in the high 1.1 billion KRW range. People who lived on jeonse 4 years ago are likely to switch to purchasing when their contract ends next year.

Kim said, "Among those who paid record-high deposits in 2021, quite a few may consider buying a house," adding, "This will be an additional factor pushing sale prices up."

The people most affected by rising jeonse prices are low-income households. Those who lived in villas or multi-family houses on jeonse in 2020 must sign new contracts this year. After last year’s jeonse fraud incidents, these tenants prefer small apartments over villas. This demand is concentrated in areas like Nowon-gu, Dobong-gu, and Gangbuk-gu rather than central Seoul. Jeonse prices in these areas are also likely to continue rising.

Kim predicted, "People moving from villas to apartments for the first time, or newlyweds signing new apartment jeonse contracts, will face a significant increase in housing costs." He added, "While the two lease laws have positive aspects in protecting tenants, they also bring instability to the rental market. Measures are needed to prevent market instability during new or renewal contracts, such as raising the jeonse deposit by the total amount of 4 years’ increase at once."