Will envisioned price cap on rent work?

By Kim Tae-gyu

Pak Min-soo needed 120 million won two years ago when the 39-year-old signed a two-year lease for a 73-square-meter apartment in western Seoul under the nation’s unique ``jeonse’’ rental contract terms.

As the contract expires this summer, the office worker attempted to renew it but the owner asked for a 50-percent increase in key money, meaning a 180 million won deposit, citing market trends.

``I know that inflation happens. But the 50-percent rise in a couple of years is way too much for ordinary people like me to handle. I think the government is required to do something,’’ Pak said.

Politicians seem to be responsive to the claims of Pak and other Koreans with regard to the upswing in rent. According to real estate consultancy Dr. Apt, jeonse prices jumped an average of 37.3 million won per household in Seoul and its vicinity during the past two years.

The main opposition Democratic Party (DP) came up with an initiative in February to prevent landlords from raising rent by more than 5 percent a year ― or 10 percent when renewing a two-year contract.

Originally, the governing Grand National Party (GDP) was opposed to the idea but it eventually changed its stance, agreeing to discuss the introduction of price caps during the extra session of the National Assembly slated for this month.

The about-face of the conservative party on the jeonse policy was made after the GNP lost in the by-elections in early May amid criticisms that it is designed to only benefit wealthy people.

Jeonse is a Korea-specific lease method in real estate. Instead of paying monthly rent, tenants disburse a lump-sum deposit, or jeonse, which usually amounts to around 30-50 percent of the property’s value at the start of a contract which typically lasts two years.

Landlords are required to return the deposit at the end of the contract.

Pros and cons

However, top bureaucrats showed negative responses to the plan, including Strategy and Finance Minister Bahk Jae-wan and Minister of Land, Transport and Maritime Affairs Kwon Do-youp.

They raised concerns about the adverse effects of the price control such as shortage of supply or the signing of under-the-table agreements, which usually takes place when official prices are set below real market prices.

``Homeowners may jack up the rent substantially before the start of the price-capping system. Or housing construction may go south over the long haul,’’ Bahk said. ``We have to delve into the upsides and downsides of the policy before phasing it in.’’

Kwon, who is in charge of the country’s housing policies, concurs.

``I understand the intent of the scheme. But it is feared to prompt the upsurge of rent in the short-term. Otherwise, people may resort to illegal contracts,’’ Kwon said.

Experts point out that the administration needs to be cautious in launching the unprecedented policy.

``Basically, I see the positive aspects of having price ceilings in the jeonse market since an abrupt surge in prices will weigh too heavily on the lives of ordinary people,’’ said Yu Byoung-gyu, a senior economist at the Hyundai Research Institute.

``Should it be introduced, the ceiling should be proper. In case it is too strict, supply will be jolted so that potential tenants would have problems finding places to lease.’’

Prof. Lee Phil-sang at Korea University said, ``In well-oiled markets where prices reflect supply and demand in an appropriate manner, prices should not be regulated. We should just let the market system work.’’ `

`But that is not the case in the Korean leasing market, which is overwhelmed by speculative demands. I agree with the initiative on putting restrictions on raising jeonse prices,’’ Lee said.

Lee said that the 5-percent rule would be fine because it is in line with the inflation rate of Asia’s No. 4 economy, which typically ranges between 3 and 5 percent a year. In contrast, Yu at Hyundai refused to comment on the 5-percent rule.