Transaction Slowdown and Interest Rate Cuts... Concerns Over Seoul's Jeonse Crisis

Simultaneous Factors Increasing Jeonse Demand
Gangnam Area Jeonse Listings Jump Over 100 Million Won in Months
Prolonged Economic Downturn Likely to Increase Jeonse Tenants' Hardship

[Image source=Yonhap News]

[Asia Economy Reporter Moon Jiwon] Concerns are rising that the jeonse (long-term lease) shortage may reoccur in Seoul due to the contraction of sales transactions amid the spread of the novel coronavirus infection (COVID-19) and the base interest rate cut. In fact, some complexes in the Gangnam area have recently detected a sharp rise in jeonse prices. Analysts suggest that if the housing market stagnates, the shortage of jeonse could increase tenants' hardships.

According to the weekly apartment price trend report by the Korea Real Estate Board on the 24th, as of the 16th, the jeonse prices of apartments in Seoul rose by 0.04% compared to the previous week, continuing the upward trend. The Seoul apartment jeonse price index by KB Kookmin Bank's LivOn, a private research institute, also continued to rise from 100.4 at the beginning of the year to 100.9 last week.

The jeonse supply-demand index started at 151.2 in the first week of January and reached a yearly high of 160 in the second week of this month. A jeonse supply-demand index above 100 means demand exceeds supply. This contrasts with the Seoul apartment sales prices, which turned to a flat trend after 37 weeks (according to the Korea Real Estate Board) due to the spread of COVID-19 and government regulations.

Experts predict that the combined effects of the sales market contraction, increased holding tax burden due to official price hikes, and interest rate cuts are likely to destabilize the jeonse and monthly rent markets. Kwon Il, head of the research team at Real Estate Info, said, "Since multiple factors that can increase jeonse demand have occurred simultaneously, there is a high possibility that jeonse prices will rise."

In fact, an 84.943㎡ (exclusive area) unit in Banpo Xi, Banpo-dong, Seocho-gu, was leased for 1.37 billion KRW in January but jumped to 1.5 billion KRW for the same floor last month. Currently, the asking price for a royal floor unit in this apartment is around 1.55 billion KRW. Similarly, the jeonse price of an 84.99㎡ unit in Resentz, Jamsil-dong, Songpa-gu, which was around 900 million to 1 billion KRW at the beginning of the year, has now risen to 1 billion to 1.25 billion KRW.

Since jeonse prices are influenced by supply and demand, they are likely to rise if sales transactions shrink due to falling house prices. Ham Youngjin, head of the Big Data Lab at Zigbang, forecasted a strong jeonse price trend, saying, "If the demand for 'owning a home' decreases, the demand remaining in the rental market will increase, and due to low interest rates, landlords are more likely to convert to deposit-based monthly rent."

The increasing relocation demand due to reconstruction projects across Seoul is also a burden on the jeonse market. In Gangnam-gu alone, 888 households in Cheongdam Samik Apartments, Cheongdam-dong, will start relocating this month. In Seocho-gu, 3,000 households in Sinbanpo 4 District will begin relocating from May. Experts predict that the jeonse shortage will spread mainly in the Gangnam area, as households with children are likely to settle nearby due to educational concerns.

If house prices fall and the demand for 'gap investment'?buying homes with jeonse deposits?decreases, the supply of jeonse may also shrink. The Korea Real Estate Board explained, "Although jeonse prices have remained stable in most areas due to the impact of COVID-19, with the arrival of the spring moving season and the contraction of the sales market, shortages of jeonse listings are observed mainly in areas with excellent school districts, popular large complexes near subway stations, and relatively lower-priced complexes."

However, there is also a view that a severe jeonse shortage will not occur if the COVID-19 situation ends early. Yang Yonghwa, head of the Real Estate Advisory Center at Hana Bank, said, "Some increase in jeonse demand may occur, but this is due to psychological factors expecting a drop in real estate prices," and diagnosed that if there is no sharp decline in house prices in the sales market, the rise in jeonse prices will also be limited.

This content was produced with the assistance of AI translation services.