Side Effects of Short-Term Repeal of the Three Lease Laws... 5% Rule Needs Supplementation for 2+1, 3+3, etc.

5% Rule Causes Market Rigidity

Experts Suggest Gradual Reform

Expand Options to Resolve Side Effects

[Asia Economy Reporter Kim Min-young] As the two-year mark of the Lease Protection Act approaches this August, amid concerns over a Jeonse crisis, the Presidential Transition Committee has announced a major overhaul of the lease law. Experts are proposing gradual reforms rather than a complete repeal. There are also calls to separate issues that require legal amendments from those that can be implemented immediately to ensure the revised system settles into the market.

◆Jeonse Prices Surge 15% After Lease Law Enforcement= The amended Housing Lease Protection Act, centered on the right to request contract renewal and the cap on rent increases, was enforced on July 31, 2020. Its purpose was to alleviate worries about deposits and promote housing stability. However, the law produced unexpected results: a sharp rise in Jeonse prices, dual pricing, and a Jeonse shortage. Landlords, restricted by the '5% rule' limiting rent increases, preemptively reflected four years’ worth of increases in the market, resulting in a surge in Jeonse prices. Existing listings were locked up due to the use of renewal rights, and the few available listings became more expensive.

The problem intensifies this August, marking two years since enforcement. When new listings, not subject to the 5% cap after the renewal period ends, flood the market, Jeonse prices are likely to fluctuate again. Yoon Ji-hae, Senior Researcher at Real Estate R114, pointed out, "The turnover rate of Jeonse and monthly rental properties changed from 2 years to 4 years, and the 5% rule caused market rigidity, resulting in properties not circulating and prices rising instead."

◆Flexibly Adjust the 5% Rule and 2+2 Standard= Experts say that rather than completely repealing or overhauling the lease law, gradual adjustments should be made to minimize market confusion. They suggest maintaining the rent cap and contract renewal rights but adjusting detailed criteria in the law to fit market conditions. Jeong Jae-ho, President of the Korea Real Estate Society (Professor at Mokwon University), proposed, "Considering that many people move during elementary, middle, and high school admission periods, expanding the 2+2 term from 2 years to 3 years could be an option." Researcher Yoon advised, "Expanding options to 1+1+1, 2+1, 3+3, etc., can alleviate market rigidity." Yoon also questioned whether tenants living in high-priced Jeonse properties worth 2 to 3 billion KRW should be protected, suggesting that the lease law should be applied differently based on price.

There were also opinions that instead of limiting the increase rate, the allowable range should be expanded or linked to benchmark interest rates and inflation rates. Kim Deok-rye, Researcher at the Korea Research Institute for Human Settlements, said, "Since Jeonse contracts basically last 2 years, there needs to be consideration on how to reflect market changes." Yoon added, "Following the private sector liberalization direction pursued by President-elect Yoon Seok-yeol, the 5% cap should not be uniformly applied; instead, a guideline ranging from 1% to 10% should be provided to allow landlords to decide autonomously. At the same time, a two-track system should be implemented where landlords who raise rent within the government-recommended 5% cap receive tax incentives."

On the other hand, some argue that repealing the law shortly after enforcement might be better. Lee Eun-hyung, Senior Researcher at the Korea Construction Policy Institute, said, "The contract renewal right has ambiguous standards, causing disputes in the market. Creating supplementary measures could further confuse the market and complicate the law." Kim Deok-rye emphasized, "We need to distinguish between systems that can be implemented immediately and issues that require legal amendments. Hastily changing standards will only cause market confusion, so even if it takes time, security measures that can be continuously applied to the market must be prepared."

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