[Insight & Opinion] Before Declaring War on Jeonse Fraud, We Must First Address the System's Irrationalities

Recently, the nationwide uproar over the three mothers' jeonse fraud case has drawn attention. The housing types where jeonse fraud most frequently occurs are newly built multi-unit or multi-family houses where actual transaction prices or appraised values are difficult to assess. Typical jeonse fraud begins by artificially inflating the jeonse price and then signing lease contracts for other individual units at that inflated price. Ultimately, the total rent sum of all other units exceeds the housing price, and as this repeats, the problem escalates?this is the typical progression of jeonse fraud.

In Korea, jeonse is regarded as a means of housing for the common people, but the jeonse system originally started as a mechanism for landlords to leverage. The background of jeonse's emergence lies in the underdeveloped mortgage loan market. Mortgage loans became common after the 1997 IMF crisis when commercial banks actively handled them, but before 1990, this was not the case. During the industrialization of the country and urbanization of Seoul in the 1970s and 1980s, buyers who expected housing price increases wanted to use leverage but could not, so they utilized the jeonse system. It was funded by tenants' security deposits, marking the beginning of the modern jeonse system.

The idea that jeonse is housing for the common people is also an illusion. Since jeonse requires a large lump sum from the start, it imposes a significant burden. Our rental system is divided into monthly rent, semi-monthly rent, and pure jeonse. For example, for a house with a monthly rent of 1 million won, a deposit of 10 million won is considered monthly rent, 100 million won is semi-monthly rent, and 300 million won is semi-jeonse. If the deposit is 500 million won with no monthly rent, it is called pure jeonse.

Compared to pure monthly rent, semi-monthly rent, semi-jeonse, and pure jeonse require proportionally larger amounts of tenant security deposits. Pure monthly rent only requires a monthly rent deposit of less than 12 months, but semi-jeonse requires 240 months' worth, so even if 80% is covered by loans, at least 48 months' worth of accumulated funds are needed. Also, since the money is tied up, cash flow issues arise regarding whether payments are received on time. Moreover, while jeonse loan borrowers borrow through banks, investors using jeonse have no issues with banks, so if problems arise later, the victims are always the tenants?making it a very malicious system.

Because of this, jeonse has always been accompanied by fraud. Along with the recent three mothers' case, the risks of jeonse have become more widely known, and countermeasures are being developed. However, attempts to fix the system by adding public functions to a fundamentally unregulated private finance system have not been properly organized. Systems like jeonse deposit insurance have also appeared; while these are good systems, they cannot be made mandatory for all tenants because they are redundant layers.

Recently, due to the sharp rise in jeonse loan interest rates, there is a trend favoring monthly rent. This is an opportunity for the market to better understand the irrationalities of the jeonse system and to start fundamental discussions. Jeonse fraud inevitably involves larger sums than monthly rent fraud, so victims suffer greater losses. Perhaps it is time to reconsider what rental forms are suitable for common people's housing.

Jeonse was a form of private finance that emerged when banks were underdeveloped and was introduced for the convenience of users, i.e., gap investors?nothing more. Given this origin, has anything really changed now? It will be difficult to completely eliminate jeonse in the future, but at least it should no longer be packaged as housing for the common people. If jeonse had never existed, jeonse fraud would not have existed either.

Chaesangwook, CEO of Forcommas

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