Reduction of Jeonse-to-Wolse Conversion Rate Due to Incorrect Address Identification

Not Applicable for New Contracts
Moves to Preserve Monthly Rent Income by Raising Jeonse Prices or Increasing Deposit-to-Rent Conversion Amounts
No Penalties for Conversion Rate Violations... Many Market Contracts Already at 6% Range
Government Rental Price Intervention Actually Fuels Decrease in Rental Supply

[Asia Economy Reporters Inho Yoo, Yuri Kim, Onyu Lim] The government's plan to lower the 'monthly rent (jeonse-to-monthly rent) conversion rate' to prevent the shift from jeonse (long-term deposit lease) to monthly rent is facing backlash immediately after its announcement. The market is already showing signs that landlords are raising jeonse prices or increasing the portion of the deposit converted into monthly rent to compensate for the reduced monthly rental income. There are concerns that lowering the jeonse-to-monthly rent conversion rate may not prevent the shift to monthly rent but instead increase tenants' monthly rent burden.

According to the Ministry of Land, Infrastructure and Transport on the 20th, although the government decided at the Real Estate Market Inspection Ministerial Meeting the previous day to lower the current 4.0% jeonse-to-monthly rent conversion rate to 2.5%, frontline markets predict that this will not help prevent the 'monthly rentification of jeonse' caused by the implementation of the jeonse-to-monthly rent cap system and the contract renewal request right system.

◆Landlords Raising Prices Due to Reduced Rental Income

A representative from real estate agency A in Seohyeon-dong, Bundang New Town (hereafter referred to as the agency) said, "The shift from jeonse to monthly rent is occurring in new contracts rather than contract renewals," adding, "Landlords are increasing the amount converted from the deposit to monthly rent to compensate for the reduced monthly rental income caused by the lowered conversion rate." Since the conversion rate applies only to contract renewals, the lowering of the rate is affecting new lease contracts. The head of real estate agency B in Namgajwa-dong, Seodaemun-gu also said, "Contract renewals are unavoidable, but many landlords plan to raise the jeonse and monthly rent prices at new contracts considering the '4-year jeonse' period."

There are also concerns that this measure could worsen the shortage of jeonse listings in the market. From the landlords' perspective, rather than renewing contracts with reduced monthly rent, they prefer to secure funds, evict tenants, live in the property for a certain period, and then list the property again at higher jeonse or monthly rent prices. A representative from real estate agency C in Garak-dong, Songpa-gu said, "There are many cases where landlords want to move in themselves to prevent tenants from exercising the contract renewal request right at the end of the jeonse term," expressing concern that "it is already difficult to find rental properties, and the jeonse and monthly rent shortage will worsen." Online, voices of opposition to the new lease law and the lowering of the conversion rate are rising, with comments like "I will leave the rental market" and "I might as well live with my parents."

◆Doubts About Effectiveness of Conversion Rate Due to Landlord Dominance

Although the government lowered the jeonse-to-monthly rent conversion rate, the fact that it is not mandatory raises doubts about the policy's effectiveness. If rental listings are abundant, there would be no problem, but with the prolonged shortage of listings and a landlord-favored market, adjusting the conversion rate is unlikely to have any impact.

In fact, the existing 4% conversion rate has long been ineffective in the market. Many semi-jeonse listings in newly built apartments in Seoul's Gangnam area, Mapo, and Yongsan districts are paying monthly rent at conversion rates exceeding 6%. According to the Korea Real Estate Board, the jeonse-to-monthly rent conversion rate in the metropolitan area in July this year was 5.7% (4.81% according to KB Kookmin Bank), far exceeding the current standard of 4%.

The shortage of listings is already becoming a reality in many parts of Seoul. According to Asil, as of the 20th, the Eunma Apartment in Daechi-dong, Gangnam-gu, Seoul, with 4,424 households, has only 57 total jeonse and monthly rent listings, of which 47 are monthly rent and only 10 are jeonse. The situation is similar in the northern part of the city. At Raemian Oksu Riverzen in Oksu-dong, Seongdong-gu, out of 1,551 households, there are 12 jeonse listings and 23 monthly rent listings.

Issues of fairness are also raised regarding the subjects and timing of application. Unless the 2.5% conversion rate is retroactively applied to existing contracts and landlords are forced to reduce existing monthly rents, there could be significant fairness issues among tenants.

Ham Young-jin, head of Zigbang Big Data Lab, said, "Direct price control by the government in the rental market is likely to accelerate the reduction and shrinkage of private rental businesses," adding, "Every 4 years when the lease protection period ends, there is a rapid increase in monthly rent conversions or rent hikes, which, combined with reduced investment returns for landlords, could accelerate landlords' exit from the market."

◆Price Intervention Causes Withdrawal of Listings

The market criticizes the government's approach to the private rental market as creating a vicious cycle that worsens the market situation. Unlike sales, the rental market operates strictly on actual demand, and excessive pressure on landlords has caused listings to disappear from the market.

An official from a private research institute, who requested anonymity, said, "If the government directly intervenes in the private rental market where prices are determined through negotiations between landlords and tenants, market distortion occurs," and pointed out, "We need to abandon the impatience to quickly fix prices in the short term and focus on restoring market functions."

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