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.