’Jeonse’ reaches up to 60 percent of home prices
By Kim Tong-hyung
The difference between the cost of renting a home and buying one is at its smallest in seven years, the latest figures show. Demand for rental properties has been soaring to record levels as people delay plans to buy their own homes because of the downturn in the housing market.
Prices for ``jeonse’’ in apartment units reached 60 percent of purchase prices nationwide last month, the highest level since 60.1 percent in July 2004, according to recent data from KB Kookmin Bank.
Jeonse, a financing tool unique to Korea, is based on a lump sum deposit a tenant pays to their landlord at the start of a contract. Tenants have the money returned to them with no interest when the contract expires, typically after two years, with the imputed interest considered rent.
Jeonse has dominated Korea’s housing rental market since the 1970s, but with the air being let out of the housing market, landlords and tenants are increasingly converting to less-risky ``wolse,’’ or monthly contracts.
Jeonse costs in Seoul were measured at 50.5 percent of house prices in October, breaching the halfway mark for the first time since May 2004, the bank said.
The jeonse-to-price ratio in northern Seoul areas was measured at 53.2 percent, while the number for the more affluent southern Seoul areas was at 48.4 percent, which still represented the highest level since May 2003.
Jeonse costs were equivalent to 54.5 percent of house prices in Gyeonggi Province, 49.9 percent in Incheon, 66.5 percent in Busan, 70.1 percent in Daegu, 74.7 percent in Gwangju and 71.5 percent in Ulsan.
After enjoying rapid rises in the earlier part of the 2000s, house prices here have been freefalling since the Lehman Brothers collapsed in 2008. There is a possibility that the housing market could take another sharp lurch downward as consumers face an environment of firming interest rates.
Optimists will point to the shrinking gap between rental values and house prices and predict that the housing market is on the verge of a bounce-back. There will be a point where people deicide they would rather own a home than rent one, they say, claiming that the surging rents indicate that real, non-speculative housing demand continues to exceed supply.
Pessimists, who appear to have credibility on their side these days, retort that the increase in jeonse prices could prove to be a temporary bounce from would-be homebuyers giving up on purchases and homeowners selling low on their properties and converting to tenants.
It’s hard to imagine people fully regaining confidence on purchasing homes in the foreseeable future, they say, when home prices still have room to sink further, considering that oversupply is definitely a factor in Seoul and the metropolitan area.
Although property booms are triggered when the rent-price gap narrows to a certain margin, rising interest rates suggest that the tipping point will be elusive. Besides, with the country’s consumer debt mountain approaching one quadrillion won, equivalent to an entire year’s gross domestic product (GDP), it’s plausible to assume Koreans have already maxed out their ability to borrow over their means to splurge on property.
``The rise in jeonse prices has been slowing recently as the fall moving season has come to an end. However, as home prices continue to decline, the rent-to-price ratio could continue to go up,’’ said Park Won-gap, the head real estate researcher at KB Kookmin Bank.