Growing Concerns Over Next Year's 'Jeonse Price Instability'... A Variable for Housing Price Stability

Concerns Over Increasing Jeonse Market Instability Next Year
Demand Rises but Supply of New Housing Units Falls Short
Increase in New Contracts as Lease Renewals Expire

Apartment complexes in Songpa and Gangnam areas as seen from the Seoul Sky observatory at Lotte World Tower, Jamsil, Songpa-gu, Seoul. [Image source=Yonhap News]

Although the rate of apartment price increases in Seoul and other metropolitan areas is gradually slowing down, concerns are rising that the jeonse (long-term lease) market could become even more unstable next year. This is because jeonse demand is increasing due to pre-sale subscriptions, while apartment supply is expected to decrease until 2023. Additionally, the flood of new contracts that will no longer benefit from the rent and lease price cap system starting next year adds pressure to the market. Jeonse prices, which are considered a leading indicator of sales prices, are expected to play a key role in stabilizing the real estate market in the future, but the government appears to have no adequate measures in place.

Side Effects of Contract Renewal Explode

The biggest factor contributing to jeonse price instability next year is the demand for new contracts following the expiration of contracts under the contract renewal right exercised last year. With the implementation of the two rental laws?the contract renewal right and the rent and lease price cap system?at the end of July last year, tenants who extended their contracts for two years with a 5% cap on deposit increases will begin to reach the end of their terms starting next summer.

Unlike renewal contracts, new contracts are not subject to the cap, so the jeonse prices that surged over the past two years are likely to be fully reflected at once, increasing the burden on tenants. The market is already experiencing a severe dual pricing phenomenon, with price gaps reaching up to hundreds of millions of won between new and renewal contracts for the same complex and the same apartment size. Although the Ministry of Land, Infrastructure and Transport (MOLIT) boasted that the contract renewal rate exceeded 70%, it could turn into a ‘time bomb’ next year.

Demand Increases but Supply Decreases

The increase in jeonse demand due to expanded pre-sale subscriptions and tightened mortgage loan regulations is also problematic. To ease short-term housing price instability, the government is increasing pre-sale subscriptions, which take at least 4 to 5 years until move-in. Since winners of these subscriptions must remain without homeownership during this period, it inevitably puts pressure on the rental market.

However, apartment supply is expected to decline until 2023. According to Real Estate 114, supply in the metropolitan area will be 164,000 units next year, 161,000 units in 2022, and 150,000 units in 2023, marking three consecutive years of decline. Minister Noh Hyung-wook of MOLIT also referred to next year, when supply decreases, as a ‘stress period’ during a recent press briefing and acknowledged the need for short-term supply expansion measures.

Strengthening Jeonse Loans?

Although the government recently excluded jeonse loans from the Debt Service Ratio (DSR) regulations as part of household debt management measures, there are forecasts that regulations may be tightened in the future. It is known that the government is considering a ‘Plan B’ to include jeonse loans in the DSR depending on market conditions. Already, commercial banks such as KB Kookmin Bank have raised the bar by limiting jeonse loan amounts to within the range of the deposit increase starting this week, raising concerns that price instability may worsen once the winter off-season ends.

No Effective Solution to Control Jeonse Prices

Despite the growing possibility of jeonse market instability, there seems to be no appropriate countermeasure. Minister Noh indicated that regarding the jeonse issue, "Ultimately, the overall stability of the housing market is necessary," suggesting that there are no plans to announce special measures. He explained that increasing supply to stabilize both sales and jeonse prices is the straightforward approach. However, there are limits to supplying apartments close to workplaces that buyers want until next year, leading many to point out that the straightforward approach Minister Noh mentioned is unlikely to have short-term effects.

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