South Korea’s Jeonse System Faces Crisis as Falling Property Prices Threaten Deposits

The jeonse system traces its roots back to the 19^th century but gained prominence in the 1970s during South Korea’s industrialization phase.

South Korea’s unique jeonse system, which involves landlords collecting substantial deposits from tenants, is facing a major crisis as plummeting property prices put tenants’ deposits at risk. Historically, the jeonse system has provided an alternative to mortgages for many South Koreans, but the recent downturn in the housing market has led to an increase in defaults and court cases as landlords struggle to repay tenants’ deposits.

The jeonse system traces its roots back to the 19^th century but gained prominence in the 1970s during South Korea’s industrialization phase. It involves tenants paying a substantial deposit, ranging from 50% to 90% of the property’s value, at the beginning of a lease period, usually lasting two years. In return, tenants are exempt from paying rent, while landlords invest the funds and aim to profit from them. However, the system heavily relies on property price appreciation, as landlords use deposits from new renters to repay outgoing tenants.

As property prices have experienced a downturn, the jeonse system has encountered challenges. In Seoul, the capital city and home to about one-fifth of the country’s population, property prices have dropped by 9% in the year through March, marking the largest decrease among Asian cities during that period. Some neighborhoods have witnessed even steeper declines, with drops of up to 30%. Consequently, landlords are now collecting smaller deposits from new tenants, which makes it increasingly difficult for them to repay renters whose leases are expiring.

This predicament has resulted in a growing number of defaults and court cases. In the first half of 2023 alone, tenants filed over 19,200 court cases against landlords for unreturned deposits, representing a 60% increase compared to the entire year of 2022. Disturbingly, the crisis has had tragic consequences, as at least five tenants who suffered financial losses from unreturned deposits have taken their own lives, according to police reports.

The repercussions of the crisis extend beyond individuals, impacting the government and financial institutions. The Korea Housing and Urban Guarantee Corp., the government body that provides deposit insurance, recorded a record payout of 1.17 trillion won in compensation in 2022, and this figure may rise to as much as 4.7 trillion won this year, as estimated by Eunyoung Choi, executive director of the Korea Center for City and Environment Research. However, only around 20% of jeonse renters have fully insured their deposits, leaving a majority of tenants at risk of losing a portion of their money.

To address the escalating crisis, the South Korean government has taken measures to crack down on jeonse fraud. A task force has been established to investigate individual landlords and real estate brokers, leading to the exposure of several criminal rings involved in fraudulent activities. The government has also introduced initiatives to enhance renter protections and transparency. For instance, an app has been released that allows prospective tenants to check if landlords have any tax liens on their properties.

In addition, discussions are underway regarding potential reforms to the jeonse system. The Ministry of Land, Infrastructure, and Transport, responsible for overseeing the system, has proposed the involvement of a third-party custodian, such as a brokerage, to hold the jeonse deposits. However, this proposal has faced resistance from landlords, who remain skeptical about the idea.

Critics argue that the government shares some responsibility for the crisis due to its failure to address excessive borrowing within the jeonse system. They highlight the substantial amount of money released into the housing market, particularly through jeonse loans. Opposition lawmaker Sim Sang-Jung warns of a potential burst bubble in the housing market, specifically in relation to jeonse loans, which have experienced a significant surge.

The outlook for the jeonse system remains uncertain as property prices continue to fluctuate. Experts anticipate a surge in defaults as leases signed during the peak period expire, with deposits based on record-high prices. Ongoing government intervention and reforms will be necessary to safeguard the interests of tenants and stabilize the housing market. South Korea’s jeonse system, once a cornerstone of the country’s housing market, now faces a challenging crossroads as the property market undergoes a transformation. The resolution of this crisis will require a delicate balance between the interests of tenants, landlords, and the government, aiming to provide stability and transparency in a system deeply intertwined with South Korea’s economic landscape.