'2 Years of Lease Law' In July, If Jeonse Rises Sharply, Monthly Rent Demand May Surge

Acceleration of the 'Jeonse to Monthly Rent' Shift in the Second Half of the Year

Loan Regulations and Interest Rate Hikes Overlap

Monthly Rent Trend More Pronounced in Low-Cost Housing Concentrated Areas such as Seoul, Jung-gu, Jongno-gu, and Gwanak-gu

Seoul Apartment Index in May Hits Highest Level Since Statistics Began

Jeonse is a Ladder to Homeownership... But Monthly Rent Burden May Make It Out of Reach

[Asia Economy Reporters Minyoung Kim, Dongpyo Kim] The trend of jeonse turning into monthly rent is expected to accelerate in the second half of the year. With the two-year anniversary of the Lease Protection Act coming up in July, there is a high possibility of jeonse prices rising. Coupled with loan regulation measures and interest rate hikes increasing financing burdens, more tenants may choose monthly rent. As the jeonse-to-monthly rent trend becomes dominant in the rental market, there are calls for urgent government measures to stabilize the jeonse and monthly rent markets.

◆ ‘Interest Bomb’ of 1.26 Million KRW per Month When Borrowing 400 Million KRW for Jeonse = According to KB Kookmin Bank, the annual jeonse-to-monthly rent conversion rate in Seoul was 3.19% in May. This means that if a jeonse deposit of 200 million KRW is converted to monthly rent, tenants would have to pay about 6.38 million KRW annually, or approximately 530,000 KRW per month. According to the Korea Real Estate Board, the average jeonse price in Seoul is 632.526 million KRW. Assuming an additional loan of 400 million KRW is needed to sign a jeonse contract, even at an interest rate of 3.8%, the monthly interest alone reaches 1.26 million KRW. Since the base interest rate was raised twice this year, there are cases where jeonse loan interest exceeds monthly rent.

The problem is that as loan interest rates are likely to rise further in line with the base rate increase, household financial burdens could grow even more. Accordingly, it is expected that more tenants will choose monthly rent over jeonse.

Kim Hyoseon, Senior Real Estate Advisor at NH Nonghyup Bank, said, "Due to a combination of factors such as reduced housing supply in Seoul, interest rate hikes, decreased demand for gap investment, and loan regulations, landlords and tenants are quickly agreeing to switch from jeonse to monthly rent, and this trend is expected to accelerate in the second half of the year."

◆ Monthly Rent Share Soars in Seoul’s Jung-gu, Jongno-gu, and Gwanak-gu = This monthly rent trend is especially pronounced in low-cost housing concentrated areas such as Jung-gu, Jongno-gu, and Gwanak-gu in Seoul. Senior Advisor Kim said, "Since February this year, except for nine areas including Gangnam and Yongsan, the proportion of monthly rent transactions has been higher than jeonse transactions throughout Seoul. In Gwanak-gu, the monthly rent share has risen to as high as 62%."

Last year, the rapid shift from jeonse to monthly rent was influenced by increased holding taxes such as comprehensive real estate tax and the implementation of the Lease Protection Act. This year, the phenomenon is accelerating further due to strengthened loan regulations and interest rate hikes. When the Lease Protection Act marks its two-year anniversary in July, if prices rise mainly for jeonse listings not subject to the 5% rule, this trend could deepen.

Yoon Jihae, Senior Researcher at Real Estate R114, said, "Jeonse prices may not skyrocket, but properties reflecting the jeonse price increases over the past two years will come to market, so jeonse prices are bound to rise."

◆ Monthly Rent Prices Also Soaring... Seoul Apartment Monthly Rent Index Hits Record High = Currently, monthly rent prices continue to soar. According to KB Real Estate’s monthly time series data, the apartment monthly rent index in Seoul this month was 102.3, up 6.7 points (6.95%) from 96.3 in the same month last year. This is the highest level since the related statistics began in December 2015. Incheon (103.2) and Gyeonggi (103.3) also recorded their highest indices, pushing the metropolitan area index (103.3) to an all-time high. The KB apartment monthly rent index is calculated by tracking monthly rent trends for medium-sized apartments under 95.86㎡. The rise is attributed to landlords raising monthly rent prices due to jeonse price increases and holding tax burdens, as well as more tenants preferring monthly rent due to the increased burden of jeonse prices caused by interest rate hikes.

The situation is no different for officetels, which have been popular as apartment substitutes. According to the Korea Real Estate Board, the jeonse-to-monthly rent conversion rate for Seoul officetels was 4.77% as of last month. The conversion rate, applied when converting deposits to monthly rent during jeonse contract renewals, has been rising for five consecutive months since recording 4.64% in November last year. This is also interpreted as a result of landlords and tenants preferring monthly rent.

The shift from jeonse to monthly rent and the rise in monthly rent prices are expected to immediately increase the hardship for the housing non-owners. In particular, there are concerns that the dream of homeownership for non-owners may become more distant.

Ko Joonseok, CEO of J-Edu Investment Advisory, said, "The jeonse system was a means for non-homeowners to keep housing costs low and functioned as a ‘ladder’ until they could buy a home. However, if jeonse disappears, the burden of monthly rent could make homeownership difficult." Some argue that the disappearance of jeonse could eliminate gap investment and deflate housing price bubbles. Regarding this, CEO Ko said, "That argument makes sense when supply is sufficient, but since a housing supply shortage is inevitable for the time being, tenants will generally face more difficulties than landlords."

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