[Exclusive] Government to Lower Jeonse Guarantee LTV to 70%... Blocking Gap Speculation and Jeonse Fraud [Real Estate AtoZ]

Guarantees Unavailable for Jeonse Price Ratios Above 70%
Plan for Gradual Reduction

The government is moving to lower the loan-to-value (LTV) ratio for Jeonse deposit return guarantees to 70% and to gradually reduce the guarantee ratio for Jeonse loans as well. If the Jeonse price ratio exceeds 70%, it will no longer be possible to obtain a guarantee, making it more difficult for tenants to secure funds. The government’s goal is to block gap speculation (buying properties with Jeonse deposits), prevent Jeonse fraud, and curb excessive lending.

With at least several million households affected by these policy changes, widespread disruption is expected across the Jeonse market. Landlords will find it harder to secure tenants, and ordinary people who have been living under Jeonse contracts may be pushed into monthly rentals, increasing their housing costs.

Guarantees Unavailable for Jeonse Price Ratios Above 70%... Gradual Reduction Planned

Jung Suho, Director of Housing Fund at the Ministry of Land, Infrastructure and Transport, attending the "Housing Finance and Residential Stability" grand forum held on the 28th (third from the right). HUG. Photo by Jung Suho

Jung Suho, Director of the Housing Fund at the Ministry of Land, Infrastructure and Transport, stated at the “Housing Finance and Residential Stability” grand forum held at the Korea Chamber of Commerce and Industry in Seoul on the 28th, “In 2017, the LTV for Jeonse deposit return guarantees was expanded to 100% of the property value, creating an environment where landlords could own dozens of properties without any equity, leading to zero-equity gap speculation and large-scale incidents. Although it has since been reduced to 90%, it is still too high. A gradual return to the 70-80% range is necessary.” He also pointed out, “When this system was first introduced in 2013, it was designed to resolve unsold inventory for construction companies and ensure tenant stability, but excessive guarantees have undermined its original purpose.”

The Jeonse deposit return guarantee is a system in which guarantee institutions such as the Housing and Urban Guarantee Corporation (HUG), Korea Housing Finance Corporation (HF), and Seoul Guarantee Insurance (SGI) pay back the deposit to tenants if they are unable to recover it at the end of their contract. Currently, tenants can join if they have Jeonse contracts with a Jeonse price ratio of 90% or less for homes priced up to 700 million won in the Seoul metropolitan area and up to 500 million won in other regions (126% of the officially assessed value). If the Jeonse price ratio threshold is lowered to 70%, for a property worth 500 million won, only Jeonse deposits of 350 million won or less would be eligible for the guarantee. Any contract with a higher deposit would not be covered.

In relation to this, the Citizens’ Coalition for Economic Justice argued in April that “guaranteeing a 200 million won Jeonse deposit on a property worth 200 million won has institutionalized the spread of ‘Kangtong Jeonse’ (over-leveraged Jeonse),” and demanded that the return guarantee LTV be lowered to 60% and that landlord participation be made mandatory. The Board of Audit and Inspection has also pointed out the issue of excessive guarantee ratios at HUG 16 times since 2017.

On this day, Director Jung also announced plans to reduce the guarantee ratio for Jeonse loans, which tenants use when their Jeonse deposit is insufficient. He said, “It is true that expanding loans has led to overconsumption in the Jeonse market. Although the pace of reducing the guarantee ratio may be slow due to policy burdens, the direction is clear.” After the June 27 lending restrictions, the ratio in the metropolitan area was lowered to 80%, but further measures are deemed necessary.

Jeonse 'Supply Cliff' → Shift to Monthly Rent → Increased Housing Costs... Short-term Shock Unavoidable

If the policy changes are implemented as intended, at least several million households are expected to be directly affected. According to the Korea Real Estate Board’s “Lease Market Siren,” as of July, the average Jeonse price ratio for apartments exceeded 70% in 10 out of 17 regions nationwide. For non-apartment markets such as multiplex and row houses, most regions except Seoul, Busan, Daegu, and Daejeon are affected. Considering the total number of housing units nationwide (about 19.87 million) and guarantee insurance conditions, millions of households could be hit hard.

Both tenants and landlords are expected to face increased pressure regarding housing stability. For tenants, in order to recover their entire deposit in case of emergency by joining the return guarantee, they will have to avoid properties with a Jeonse price ratio above 70%. With loan limits also reduced, it will become even more difficult to secure better Jeonse homes. Since the June 27 lending restrictions, it has already become harder for tenants to move to new Jeonse contracts, and this concern is deepening. Landlords will inevitably be affected as well. To attract tenants, they will have to lower Jeonse deposits or convert to monthly rent. With concerns about Jeonse fraud rising, tenants are increasingly avoiding properties that cannot be guaranteed.

As a result, there are predictions of a Jeonse supply cliff and an accelerated shift to monthly rent. In Seoul, the proportion of monthly rent contracts in July was 64.4%, far surpassing Jeonse contracts (35.6%). An anonymous real estate expert said, “If a large number of properties with Jeonse price ratios above 70% are excluded from guarantees, the Jeonse market itself will shrink and the shift to monthly rent will inevitably accelerate. If the villa and multiplex Jeonse markets collapse first, the housing cost burden for low-income households and young people will skyrocket.”

On the other hand, some expect that the measure could help stabilize Jeonse prices. Strengthening guarantee requirements will incentivize landlords to keep the Jeonse price ratio below 70%, and reducing loan guarantees will decrease the inflow of funds into the market, dampening upward pressure. Chae Sangwook, CEO of Connected Ground, said, “Reducing the guarantee ratio will contribute to stabilizing Jeonse prices in the short term and help improve market fundamentals. However, significant pain is inevitable during the adjustment process. Jeonse as a system is already nearing the end of its role, and this measure is largely about managing that transition.”

HUG’s Financial Soundness Also Expected to Improve... "Implementation Timing May Already Be Set"

Scene from the "Housing Finance and Residential Stability" Grand Debate held on the 28th. HUG.

If the guarantee ratio is reduced, HUG’s losses are expected to decrease significantly. Due to a surge in Jeonse fraud cases and resulting unpaid deposits, HUG has recorded multi-trillion-won deficits for three consecutive years. According to last year’s financial statement, HUG’s net loss was 2.5198 trillion won, down from 3.8598 trillion won the previous year, but still a massive deficit.

Panelists from the Korea Housing Association, the Korea Real Estate Analysis Association, and HUG, which co-hosted the forum, emphasized the need to normalize the system, citing the high-risk structure of the Jeonse market, concentrated losses among young people, and the responsibility of licensed real estate agents and appraisers. One attendee commented, “It is unusual for the director in charge at the Ministry of Land, Infrastructure and Transport to publicly announce such specific plans for system improvement. We will have to wait and see whether the policy will stabilize Jeonse prices or lead to the decline of Jeonse and a shift to monthly rent.”