"Completely Dried Up": Only 3 Monthly-Rent Listings in a 3,500-Unit Complex... The Rental Cliff Becomes Reality [Real Estate A to Z]

Jeonse Drought and Record-High Monthly Rents
Average Monthly Rent in December Last Year Rose by About 8%
Cases of Just One Monthly Rental Listing Even in Large Complexes

As of the 5th, the previous day, only 6 jeonse listings and just 3 monthly-rent listings were registered in the 3,500-household complex “Gwanak Dream Town” in Gwanak District. Despite being a large-scale complex, rental supply has in effect disappeared. A nearby licensed real estate agent said, “The few listings that remain are only those where the dates do not match up,” adding, “Almost no properties are coming onto the rental market, and when they do, they are taken immediately.” At the 1,100-household “Baengnyeonsan Hillstate” apartment complex in Eunpyeong District, there is just 1 jeonse and 4 monthly-rent listings. In some complexes, the number of jeonse and monthly-rent properties is even shown as zero.

Yonhap News Agency

Rising Monthly Rents Driven by the Jeonse Shortage

As “gap investment” - buying a home with an existing tenant on a jeonse contract - has disappeared, the jeonse shortage has now expanded into a monthly-rent shortage. Even in large apartment complexes with more than 1,000 households, the number of listings is in the single digits, clearly showing that supply is falling short of demand. Although some fire-sale properties are appearing in certain parts of Seoul ahead of the heavier capital gains tax that will take effect in May, they are not sufficient to meet rental demand.

According to real estate big data firm Asil on the 6th, the number of jeonse listings in Seoul as of the 5th stood at 21,456. This represents a 24% decrease compared with the same day a year earlier (28,270).

The areas where jeonse supply has shrunk the most are those where gap investment had been relatively easy due to lower prices, such as the outskirts of Seoul. In Seongbuk District, jeonse listings have plummeted from 1,204 a year ago to 138 now. This was followed by Gwanak District (-72.5%), Dongdaemun District (-67.8%), Gwangjin District (-66.6%), Eunpyeong District (-66.4%), and Gangdong District (-65.9%), in terms of the scale of the decline. After these areas were designated as land transaction permit zones under the October 15 measures last year, investment demand for purchasing homes with existing jeonse tenants fell sharply. In this situation, existing tenants have been extending their jeonse contracts, so new jeonse supply is not coming onto the market. As more new homeowners choose to live in their homes rather than rent them out, jeonse supply has been reduced even further.

The shortage of jeonse properties is leading to an imbalance of supply and demand in the monthly-rent market. According to Asil, the number of monthly-rent listings in Seoul stands at 19,734, up 9.5% from the same period a year earlier (18,025). However, as would-be jeonse tenants who cannot find jeonse properties shift into the monthly-rent market, this level of supply is not enough to absorb demand.

On the ground, the assessment is that the market has firmly shifted in favor of landlords. A licensed real estate agent in Seongbuk District said, “Jeonse prices have already risen significantly, and landlords are using those prices as a benchmark to set higher monthly rents,” adding, “When there were plenty of listings, it was at least possible to negotiate prices during the brokerage process, but now deals are closing even when properties are listed at higher prices with other agencies, so negotiations themselves are difficult.”

According to KB Real Estate Data Hub, as of January this year the jeonse-to-monthly-rent conversion rate in Seoul was 4.25%. This has remained in the 4.25-4.26% range since October last year, and is up 0.11 percentage point from January last year (4.14%). The jeonse-to-monthly-rent conversion rate is the interest rate applied when converting a jeonse deposit into monthly rent; the higher the figure, the greater the burden of monthly rent.

Monthly rents are also climbing rapidly. According to the Real Estate Statistics Information System (R-ONE) of the Korea Real Estate Board, the median monthly rent for all housing types in Seoul reached 1,007,000 won in December last year, exceeding 1 million won for the first time since statistics began. The year-on-year increase from the same month a year earlier (935,000 won) was 7.7%, the highest annual growth rate on record. The median monthly rent is the value in the middle when all monthly rent amounts traded in a given month are arranged in order. It represents the typical level of monthly rent paid by ordinary tenants. The median monthly rent for apartments in Seoul also hit an all-time high of 1,240,000 won in December last year.

If Property Taxes Rise, Monthly Rents Will Climb Further

Experts diagnose that in a situation where the share of monthly rent has already expanded due to the shortage of jeonse listings, a hike in property holding taxes could significantly increase the risk of a sharp surge in monthly rents. Rather than being a direct trigger of a short-term spike, they warn it could act as kindling that pours fuel on an already burning market.

There is precedent for higher property holding taxes shocking the rental market. Starting in 2018, the Moon Jae-in administration significantly increased the burden of property holding taxes by gradually raising the tax rates of the comprehensive real estate holding tax and subdividing the tax base brackets throughout its term. This tightening stance on holding taxes coincided with the implementation of the three major lease protection laws in July 2020 and dealt a significant blow to the rental market. When the right to request contract renewal and caps on jeonse and monthly rent increases were introduced, both jeonse and monthly rents surged, especially for new contracts, and in the process a “tax shifting” phenomenon emerged, in which landlords passed their higher tax burden on to tenants in order to cover higher costs of maintaining rental properties.

Yoon Jihae, head of the Research Lab at Real Estate 114, said, “When property holding taxes are raised, the higher costs can be passed on sequentially at each point when landlords perceive their expenses have increased, which can make an already rising market even hotter,” adding, “In the current situation, we effectively have to assume that there is only room for monthly rents to go up further.”