[Insight & Opinion] The Era of Reverse Jeonse Is Coming...Caution Needed When Buying a Home

Many people believe that housing prices either fell or soared during the five years of the Moon Jae-in administration. However, even under the Moon administration, housing prices declined from January 2019, three months after the September 13, 2018 policy announcement. It was only in June of that year that prices began to rise again, meaning that transaction prices fell for about half a year.

The decline was driven by reverse jeonse. Typically, reverse jeonse refers to a phenomenon where the current jeonse price is lower than the jeonse price agreed upon two years earlier. In a reverse jeonse market, landlords have to return part of the tenant's deposit, and if they fail to do so promptly, a non-return situation arises. Alternatively, tenants move to cheaper jeonse properties in similar residential areas, causing vacancies. Subsequently, since the jeonse price does not adjust accordingly, landlords end up selling their homes at lower prices.

The reverse jeonse in 2019 was purely a supply-side factor. When the housing market began to recover in earnest during the early years of the Park Geun-hye administration in 2014, the accumulated supply was released all at once over about two years. As a result, while Korea typically supplied an average of about 330,000 units annually, 520,000 units were supplied in 2015, 460,000 in 2016, and after about three years, 460,000 units in 2018 and 400,000 units in 2019 were occupied. This was the result of releasing the supply that had not been provided during the stagnant market from 2008 to 2013, including the 2nd New Town developments.

The opposite of reverse jeonse is the jeonse crisis. The jeonse crisis began in earnest from July 2020, when the lease law was being revised, and continued until December 2021, when jeonse prices peaked. During this period, the zero interest rate policy due to COVID-19 coincided with massive liquidity supply, and households also pushed up jeonse prices by taking out nearly 120 trillion won in household loans annually. There was a synchronization phenomenon between transaction prices and jeonse prices to the extent that jeonse prices pulled up transaction prices.

Earlier this year, many market experts predicted a jeonse crisis in August, the second year of the lease law's enforcement, but in reality, reverse jeonse is occurring. Unlike in 2019, the current reverse jeonse is happening independently of supply. Without changes in supply, the rise in interest rates has naturally weakened household purchasing power, making it difficult to afford high jeonse prices. This is from the tenant's perspective. However, reverse jeonse also occurs from the landlord's perspective, who perceives jeonse as income. For example, a landlord holding a 600 million won jeonse deposit at 1.5% interest would see no difference in converted income even if the deposit is lowered to 300 million won when the deposit interest rate rises to 3%. In other words, landlords also have reasons to accept these changes. This reverse jeonse trend is likely to continue for more than a year because, due to the two-year lease renewal cycle, jeonse contracts that peaked in 2021 will be renewed or newly contracted in 2023.

The current reverse jeonse may be more severe than in 2019, which is problematic. Especially, the difference between past and current jeonse is that past jeonse was more like tenants' principal deposits rather than loans, giving it a somewhat deposit-like character. However, since 2019, jeonse loans have become more active. The total accumulated jeonse loan amount, which surpassed 100 trillion won in 2019, exceeded 180 trillion won by the end of 2021 and has been rapidly increasing. Jeonse prices are also strongly influenced by loan interest rates, which can cause contraction. In other words, there will inevitably be households that find it difficult to finance jeonse deposits now. This could lead to a sharper contraction in the housing market. The government has also expressed a shared sense of crisis by stating that if housing prices fall too quickly, regulatory areas will be lifted. However, since interest rates are currently sucking in demand like a black hole, it is difficult to reverse the situation. It is truly a time to exercise caution when purchasing housing.

Chae Sang-wook, CEO of Forcommas

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