by Judy Park, Analyst
South Korea’s primary housing system, called jeonse (or “key money”), dates back to their Joseon Dynasty. That is, back when the denizens of this humble country looked like this:
Jeonse is one of only two systems of its kind in the world (the other being rahn in Iran), where renting out a modest two-bedroom unit entails the lump sum possession of hundreds of thousands of dollars.
The process goes thus: tenants provide landlords with this hefty deposit to lease a unit for two years. The deposit is calculated as a certain percentage (typically 40-60% in Korea, 20% in Iran) of the value of the unit. The landlord can then invest these funds (e.g. in other properties, businesses, or at the bank) until the end of the two-year contract, when they must return the full sum to the tenant. The unit acts as collateral in the event that the landlord can’t or won’t pay it back. Estimates show that about a tenth don’t.
If interest rates are high, jeonse is good deal for landlords – it’s basically an interest-free loan. If they’ve got the cash, it’s a good deal for tenants – they can live in a unit rent-free and continue to save up money.
But getting the cash is no easy feat. The typical deposit is a casual $200,000, taking the average household five years and boatloads of fiscal restraint to save up. Despite this, it seems that much of the nation’s families are up for the challenge, as more than 60% of rental units are currently held under the jeonse system. Thus, jeonse units constitute the main source of affordable housing for low and middle income families in the country.
However, criticism of the system has grown in recent years. In 2011, economists identified jeonse as a culprit in the nation’s recent difficulties with marriage and childbearing. Okay, that seems like a jump, but here’s the connection: Grooms are culturally expected to provide an apartment or house after getting married, which has led to many delaying the union until this is financially feasible. Coupled with the trend of rising education levels and career aspirations among women, Korea’s average age for first marriages has jumped five years since 1990, and its fertility rate of 1.24 is among the lowest for developed countries.
Less marriages means less kids means less workers means a less productive economy, which has the government so alarmed that it has resorted to the carefully calibrated policy of sponsoring dating parties for its young citizens.
(The ROK government certainly has a flair for interventionist policies – the latest Big-Mother move is an attempt to undo the wild success of government-sponsored vasectomies in the 1960s.)
While jeonse worked well when Korea was embarking on a golden age of industrialization, times have changed. As the two preconditions for its success – high interest rates and rising house prices – are notably absent in today’s economic environment, landlords are starting to either raise the deposit requirements on jeonse or move away from it altogether to wolse, a regular monthly payment system. At the same time, demand for jeonse is increasing due to a sluggish housing market. Lower interest rates are spurring tenants to cover jeonse deposits with loans, introducing banks and more risk into the historically two-party direct debt transaction.
In response, policymakers are scrambling to ramp up state affordable housing delivery, offer tax breaks to incentivize a shift to wolse, introduce home purchase programs, and reform housing finance. Korea’s first International Forum on Housing Finance was held last December, with Derek Long, veteran of UK housing and an AHI Senior Adviser, speaking as one of the global panel experts. (For his take on jeonse, click here.)
Overall, though current demand is sky-high, it is likely that the jeonse system will fall out of favor going forward. Some landlords have been opting for a middle road between jeonse and wolse by asking for a smaller (albeit still considerable) lump sum deposit with lower monthly rental payments. It would be interesting to see how this hybrid system will fare – whether it could actually achieve a happy medium or just constitute a pit stop on jeonse’s road to extinction.
What do you think? Is the reign of jeonse over? What does Korea’s housing system need to thrive in the 21st century? Would you ever go to a government-sponsored dating party? Let us know in the comments below!