Interest Rate Hikes and Housing Market Slump... Gap Investment Disappears

10,000 Houses Bought This Year Without Spending a Single Won... Warning for Empty Jeonse Cases

On the 11th, the view of a villa neighborhood from a building in Yangcheon-gu, Seoul, where villa transaction volumes are increasing. Photo by Moon Honam munonam@

[Asia Economy Reporter Kim Min-young] Due to this year's base interest rate hikes and a downturn in the housing market, 'gap investments' are expected not to increase compared to last year. However, coupled with falling house prices, the number of 'empty-can houses' is likely to surge. Homeowners who purchased houses with loans and deposit guarantees without their own capital face a growing risk of being unable to return deposits on time as house prices decline, raising concerns about the spread of empty-can houses.

According to Asil (Apartment Real Transaction Price), a real estate transaction platform, as of the 10th, the number of gap investment transactions in Nowon-gu, Seoul?the area with the highest increase in gap investment sales?dropped from 114 cases in 2020 to 55 cases last year after loan regulations were fully enforced, and further decreased to 4 cases as of this date. In Hwaseong-si, Gyeonggi Province, where small-scale gap investments were prevalent, the number of transactions increased from 117 in 2020 to 135 in 2021, but only 15 gap investments occurred this year. Gimhae-si, a non-regulated area where the sale price was cheaper than the jeonse price until early this year, saw transactions surge nearly ninefold from 25 cases in 2020 to 207 last year, but only 25 cases were recorded this year.

Professor Seo Jin-hyung of Gyeongin Women's University (Co-representative of the Fair Housing Forum) said, "When house prices rise sharply along with jeonse prices, the jeonse price approaches the sale price, increasing gap investments. Recently, however, sale prices have not risen and jeonse prices have shown a slight decline, reducing the gap and naturally decreasing gap investments."

The recent decrease in gap investments is largely due to the cooling housing market. According to the housing price trend survey by KB Kookmin Bank released on the 28th of last month, the average nationwide housing sale price in August fell by 0.14% compared to the previous month. In the KB Kookmin Bank survey, Seoul housing prices dropped by 0.07% in August, marking the first decline in 3 years and 6 months since February 2019.

The jeonse market is also continuing to weaken. According to the Korea Real Estate Board, as of August 26, Seoul apartment jeonse prices fell by 0.09%, a larger decline than the previous week (-0.06%). The Real Estate Board analyzed, "With a decrease in new jeonse demand and downward adjustments in listing prices, the rate of decline expanded compared to last week."

The problem arises when the contract period ends for houses where the sum of loans and rental deposits reaches 80-100%. If the jeonse market price falls below the contract price in line with the recent downward trend in house prices, homeowners will find it difficult to return deposits to tenants. Tenants who have subscribed to jeonse deposit insurance can recover their deposits through public institutions such as the Housing and Urban Guarantee Corporation (HUG), but there are tenants without such insurance, raising concerns about potential damages.

According to real estate transaction report data submitted by the Korea Real Estate Board to Representative Kang Dae-sik of the People Power Party, the number of reports where the combined amount of mortgage loans and rental deposits exceeded 100% of the house price increased by 41%, from 7,994 cases in 2020 (March to December) to 11,303 cases in January to July this year. Last year, when gap investments were rampant before the housing market downturn, there were 28,264 such cases. During the same period, reports where the combined amount of loans and deposits was 80% or more of the house price surged nearly threefold from 38,167 cases in 2020 to 117,279 cases in 2021, and 39,065 cases were recorded this year.

The fact that the sum of mortgage loans and rental deposits exceeds the house price means that the homeowner bought the house solely with loans and tenant deposits without any personal funds. For such houses, if the house price falls, the owner is likely unable to return the tenant's deposit fully and on time even if they sell the house. Generally, houses where the sum of loans and deposits is similar to or exceeds the house price are considered 'empty-can jeonse.'

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