[Exclusive] Government-Supported Jeonse Loan Balance Surpasses 70 Trillion Won... Fueling Housing Price Surge [Real Estate AtoZ]

Housing and Urban Fund, the Ministry of Land's Slush Fund? ①
Policy Funds Now Account for Over One-Third of Jeonse Loans
Opaque Management of the Housing and Urban Fund... Grounds for Housing Price Surge

With the government taking the lead in directly and indirectly increasing jeonse loans, the outstanding balance of jeonse loans using policy funds surpassed 70 trillion won as of last year. This figure exceeds one-third of the total outstanding loans at all domestic financial institutions. The balance has doubled compared to 2020, increasing by several trillion won each year. There are criticisms that the government, by expanding jeonse loans over the past three to four years, has provided the grounds for the recent surge in housing prices.

According to an analysis by The Asia Business Daily on November 11 of the Ministry of Land, Infrastructure and Transport’s Housing Affairs Manual, the National Assembly Budget Office’s budget analysis report for next year, and the annual audit report of the Korea Housing & Urban Guarantee Corporation, the total outstanding balance of the Bogeumjari Loan (jeonse loan) stood at 76.0766 trillion won at the end of last year. This figure includes both the direct loans provided by the Housing and Urban Fund, which finances the Bogeumjari Loan, and loans disbursed through the interest subsidy method, which is also a fund project.

Promotional material for jeonse loan guidance posted at commercial banks. Photo by Yonhap News Agency

Until now, the amount directly supplied as jeonse loans from the Housing and Urban Fund had been released through fund settlement data. However, this is the first time that the total, including the interest subsidy method, has been made public. The interest subsidy method covers the difference between the policy loan interest rate and the commercial bank rate using the fund. It serves as a priming mechanism for banks to provide loan funds. Due to the interest subsidy method, jeonse loans from the fund can be considered policy loans that reflect government influence.

As a result of the interest subsidy method, jeonse loans have grown rapidly. In terms of outstanding balance, the amount increased by several trillion won each year from 37.5234 trillion won in 2020. In the first half of this year, the outstanding balance of loans executed through the interest subsidy method reached 54 trillion won.

The outstanding balance of direct loans has not yet been disclosed as the settlement is not finalized. However, assuming it remains at the five-year average of 26 trillion won, the total is expected to exceed 80 trillion won by the end of this year. In addition, the government estimates that the outstanding balance of interest-subsidized loans next year will reach 67 trillion won. Even if the direct loan balance remains at the five-year average, the total will surpass 93 trillion won.

This rate of increase is rapid, even compared to the total jeonse loans at domestic financial institutions. The Financial Supervisory Service does not separately disclose the total outstanding jeonse loans at financial institutions. According to data previously obtained by the Citizens' Coalition for Economic Justice through a lawmaker’s office, the total stood at about 170.5 trillion won in 2022. The industry estimates that the total outstanding jeonse loans last year reached about 200 trillion won. While the total jeonse loan balance increases by about 11% annually, the Bogeumjari Loan, including the interest subsidy method, has an average annual growth rate of 19%, nearly twice as high.

In the past, jeonse contracts were limited to the net assets owned by tenants. However, as jeonse loans became more accessible, tenants could borrow beyond their existing assets. Landlords increased jeonse prices, and tenants had to take out loans to secure housing. This rise in jeonse prices, in turn, pushed up home prices, a structure that took firm hold in the 2010s. Until various loan regulations were tightened this year, jeonse loans were widely used for gap investments. Unlike mortgages, jeonse loans are extended without collateral such as housing, but are based on guarantees from public institutions.

A villa-dense area in Yongsan-gu as seen from Namsan, Jung-gu, Seoul. Photo by Jin-Hyung Kang aymsdream@

By supplying large-scale funds to the housing market directly and indirectly through the Housing and Urban Fund, the government has played a leading role in creating the conditions for a sharp rise in home prices. The Housing and Urban Fund, operated and managed by the Minister of Land, Infrastructure and Transport, was established under the pretext of ensuring housing stability for ordinary citizens. However, due to its non-transparent management, it has faced criticism for being reduced to a slush fund for the administration and a handful of managers.

Park Jun, a professor at the University of Seoul, pointed out, "Large-scale policy loans based on interest rate compensation have acted as a catalyst, stimulating housing demand and reigniting the real estate market, which had been stabilizing." He added, "Low-interest policy loans have spurred demand for home purchases, and as the policy target expanded to include the middle and high-income classes, this has fueled both household debt and rising home prices."