'Jeonse' price spiral
Rents soar for 40 consecutive months
By Kim Tong-hyung
Rents rose nationwide for the 40th consecutive month in June, in the longest streak ever, as demand continues to be boosted by frustrated homebuyers, research indicated Monday.
The amount of ``jeonse,’’ (a lump-sum deposit on a rented property) still the dominant housing rental system here, increased by nearly 40 percent during the period, more than three times faster than the pace of consumer price inflation.
While optimists had pointed to the closing gap between rent and purchase prices to predict a housing market rebound, the realities of the current market now make these claims look rather foolish. Every indication shows that freefalling property prices, which have been triggering apocalyptic talk about a Japanese-style collapse, are continuing to scare away would-be buyers.
Data from KB Kookmin Bank shows that jeonse deposits nationwide have continuously risen every month since March 2009, with monthly increases ranging from 0.1 percent to 1.7 percent. This marks the longest growth streak since the bank began keeping related records in 1986.
Headline inflation was measured at 10.4 percent during this period, suggesting that the rising cost of housing was a major culprit in the acute squeeze on living standards for average Koreans in recent years.
The increase in jeonse amounts was clocked fastest from the fourth quarter of 2010 through to the third quarter of last year, as the housing market reeled in the aftermath of the global downturn. However, the pace of increase has slowed since peaking at 1.7 percent between February and March this year, according to Park Hab-soo, a KB real-estate market specialist.
``Non-speculative demand for housing continued to exist, but people were delaying plans to purchase due to market uncertainties and the government introducing plans to provide cheaper housing for low-income earners, such as the `bogumjari’ scheme,’’ Park said.
The “bogeumjari’’ scheme is a public housing project pushed since 2009 by the Lee Myung-bak government, which aims to provide cheaper housing for low-to-mid income earners who don’t own any property. State-owned housing agencies like LH built apartments on state-owned land and the Korea Housing Finance Corporation provided long-term, fixed-rate mortgage loans for those eligible to purchase these particular homes. Purchasers gain ownership of the apartment units, but pay land rent.
``At this time, the rental market appears to be entering a phase of stabilization as the cycle of concentrated two-year contracts seems to have passed. And there are an increasing number of tenants preferring `office-tels’ and other compact housing units to apartments.’’
The steep rise in rents is being driven by soaring demand as first-time buyers continue to delay or give-up getting on the property ladder in face of a sinking property market and economic uncertainty.
Credit is also less available than it was during the mid-2000s property boom because banks are strengthening lending restrictions in response to historically high levels of household debt and rising delinquency rates.
The supply of rental homes is not increasing fast enough to meet the new levels of demand, prompting a hiking spree by landlords, who also face difficulties getting a mortgage.
The environment of low borrowing costs, which will surely be extended by the Bank of Korea (BOK)’s decision to slash its policy rate, also appears to be depressing the supply of jeonse, despite the obvious demand.
Jeonse, a financial agreement unique to Korea, is a deposit paid to landlords at the start of a rental contract. Tenants have this deposit returned to them with no interest when the contract expires, typically after two years, with the imputed interest considered as rent for that time period.
The benefits of jeonse are clear-cut, at least during times when people think house prices will be rising forever. During a property boom, landlords would rather borrow directly from tenants than absorb the high interest rates tagged to bank loans, which provides an easier way for them to finance further home purchases.
And tenants favored jeonse, which cost them about half the expense of purchasing a home, simply because they get their money back after the end of the contract. Obviously, these strengths become irrelevant when the housing market lapses into a coma.