Reduction of Jeon-Wolse Conversion Rate Sparks Effectiveness Debate

[Asia Economy Reporter Yoo In-ho] Starting from the 29th, the 'monthly rent (jeonse-to-monthly rent) conversion rate' applied when converting all or part of the jeonse deposit into monthly rent will be lowered from 4% to 2.5%.

However, the market is skeptical about its effectiveness since this regulation does not apply to new leases and there are no penalties for violating it.

The prevailing view is that the trend of 'jeonse turning into monthly rent' following the implementation of the Jeonse-Monthly Rent Cap System and the Lease Renewal Request Right System will be difficult to change.

According to the Ministry of Land, Infrastructure and Transport on the 23rd, the revised Enforcement Decree of the 'Housing Lease Protection Act,' which includes lowering the statutory monthly rent conversion rate and expanding the Dispute Mediation Committee nationwide, passed the Cabinet meeting yesterday.

The revised Enforcement Decree is expected to be implemented on the 29th after presidential approval and promulgation. The jeonse-to-monthly rent conversion rate is the rate applied when converting all or part of the jeonse deposit into monthly rent. It is not applied when converting monthly rent back to jeonse.

If the conversion rate is lowered, the tenant's monthly rent burden will be somewhat reduced. For example, if 500 million KRW of a 1 billion KRW jeonse is converted to monthly rent and the conversion rate of 2.5% is applied, the monthly rent would be '(500 million × 0.025) ÷ 12 = 1,041,666 KRW.' This means the monthly rent burden decreases by 37.5% compared to the previous rate of 4%, which would have resulted in 1.7 million KRW monthly rent.

However, the market expects that the reduction in the jeonse-to-monthly rent conversion rate will not have a significant impact on the rental market because the conversion rate itself is not mandatory.

In fact, there is no penalty clause for failing to comply with the conversion rate set in the Enforcement Decree. Experts point out that it is difficult for the government to impose fines through the Enforcement Decree on private transactions.

Moreover, the conversion rate only applies when the tenant exercises the lease renewal request right. For contracts where the right is not exercised, whether the tenant is existing or new, it is considered a new contract, allowing the landlord to set the jeonse or monthly rent freely, making the application of the conversion rate meaningless.

The existing 4% conversion rate has already become ineffective in the rental market. In fact, many semi-jeonse listings in newly built apartments in Seoul's Gangnam area, Mapo, and Yongsan are paying monthly rent at conversion rates exceeding 6%, more than double the lowered standard of 2.5%.

Although the government has announced plans to expand the Housing Lease Dispute Mediation Committee to address jeonse-monthly rent disputes, the industry believes this too will have limited effectiveness.

The mediation process is not binding, and there is no clear solution if the mediation results are rejected.

An expert said, "I understand the government is discussing measures to strengthen the effectiveness of the Dispute Mediation Committee, but if the government directly controls prices in the lease market, it is highly likely to accelerate the reduction and shrinkage of private rental businesses."

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