Updating real estate industry
Real estate is one of the most uncompetitive sectors of the Korean economy. A complex mixture of old-dated business practices and government intervention plagues the industry. The result is high prices for low quality amid a limited number of choices that leaves everybody unhappy. The faults in the real estate industry are particularly glaring as other sectors of the Korean economy have made great progress.
A quick comparison of Korean real estate websites with those in other countries reveals the extent of the problem. Real estate sites in Korea list basic information, such as size and price, but not much more. Often a short description is included, but photographs are relatively rare.
For buyers of condos, a price range based on recent sales is given as a reference. Major sites in the United States, by contrast, almost always include photographs, often of each room. Information on sales history, price history, and comparable offerings in the area is given. Buyers can easily search recent sales of all forms of residential real estate in the area.
To make up for the lack of information on websites, Koreans usually end up visiting real estate agents in person. Like their counterparts elsewhere, most are professional and they arrange showings quickly. Detailed information in writing, particularly on detached houses and other non-condo types of housing is often lacking. Information on price history is difficult to obtain and realtors themselves may not know.
One of the most curious practices is for sellers to raise the price after a realtor has shown the house, a practice that is unthinkable in countries where sellers are required to sign a contract with realtors that places limits on behavior such as multiple listings and discrimination against buyers.
For renters, the situation is problematic because landlords are free to demand a high security deposit along with a monthly rent. There is no set standard of one or two months' rent as a security deposit. The larger problem, however, is that landlords are free to increase the rent, the security deposit, or both at the end of the two-year contract. This creates a situation in which renters always feel insecure, and thus feel permanently detached from neighbors and the community that they live in.
The larger problem for the Korean real estate industry is the continued existence of the “jeonse” system. Jeonse, or ``prepaid rent," is basically a huge security deposit that is returned at the end of the two-year contract. In the days of high interest rates, landlords made money by investing the deposit. Others would use the money to help purchase properties that would go up in price.
At first glance, jeonse looks like a great system. Renters do not need to pay a monthly rent, which allows for increased saving. Landlords can obtain a chunk of interest-free leverage. A closer look reveals problems. Interest rates in Korea are no longer high, which means that returns on invested jeonse are not good. Indeed, returns on rental properties in Korea are among the lowest in the developed world. High security deposits and jeonse keep rents low, while purchase prices of properties remain high.
The larger problem is that the jeonse system inhibits ownership. Often the amount of the deposit equals half the purchase price, which in the case of Seoul usually amounts to a huge amount of money. The same amount could be used toward the purchase of a house with the remainder coming from a loan. The loan would require interest payments, but the resident would be an owner, not a renter, and would have a greater sense of security.
Home ownership is not always the best financial choice, but it creates greater social stability because home owners have a financial and emotional stake in their property. They maintain their property better and created deeper bonds with the community, which creates more stable neighborhoods. This is why ownership is used as a measure of social development around the world.
The Korean government, like governments elsewhere, has actively encouraged ownership. This explains the government's active stance in promoting the construction of condos and rental apartments. Government intervention in the real estate industry has focused mainly on building supply and limiting speculation in hot areas such as Gangnam.
To date, the government has done little to protect consumers (renters and buyers) or to develop a more advanced real estate sector. To improve the situation, the government must implement stricter regulations regarding transparency while allowing realtors to make a fair profit from their work. Above all, it must take a hard look at the jeonse system.
The writer is a professor at the Department of Korean Language Education at Seoul National University. Email him at email@example.com.