[The Editors' Verdict] Real Estate Policy Failures Spark Jeonse Fraud

[Asia Economy Jeong Doohwan, Content Manager] The ongoing jeonse frauds in mid-to-low priced villa-dense areas such as Hwaggok-dong, Seoul, are driving tenants into fear. The jeonse fraudsters, known as "Villa Kings," are systematically purchasing large numbers of villas and officetels, renting them out, then taking out loans and disappearing, creating hundreds of victims. With some landlords even passing away, many tenants find themselves unable to receive relief such as deposit insurance.

The direct cause of the Villa King incidents lies in loopholes in the Housing Lease Protection Act. A typical method exploits the fact that the priority repayment right takes effect from the 'day after' the confirmed date is received, allowing loans to be taken out before that date.

What must be emphasized is that flawed real estate policies created market conditions that allowed large-scale jeonse fraud to occur.

According to statistics from KB Kookmin Bank, during the five years of the Moon Jae-in administration, which imposed unprecedented real estate regulations, the jeonse prices of houses in Seoul rose by 27.5%. Of course, this is an average. The perceived increase rate in individual areas and complexes far exceeds this.

What further fueled market anxiety was the "Three Lease Laws" pushed through by the then ruling party in August 2020 despite expert opposition. The Three Lease Laws rapidly increased the jeonse and monthly rent prices not only in central Seoul apartments but also in outer row houses and multi-family homes, exacerbating housing insecurity.

In particular, the sharp short-term rise in jeonse prices increased the risk in the mid-to-low priced housing transaction market such as row houses and multi-family homes. The gap between sale and jeonse prices rapidly narrowed, creating fertile ground for organized jeonse fraud. Because investment could be minimized, a market environment was created where hundreds of villas could be purchased in bulk without large amounts of money.

This is also confirmed by statistics. According to KB Kookmin Bank, the ratio of jeonse price to sale price for apartments, which was 73% in May 2017 when the Moon Jae-in government took office, dropped sharply to 54.7% in May last year, five years later. This was not because jeonse prices fell but because sale prices rose rapidly. Meanwhile, during the same period, the jeonse-to-sale price ratio for row houses remained almost unchanged, from 69.9% to 69.6%.

The side effects of real estate market regulations represented by the Three Lease Laws are still ongoing. The damage is not limited to extreme cases of some Villa King frauds.

With rising interest rates and economic recession causing the housing market to freeze rapidly, the current jeonse and monthly rent market is experiencing aftereffects comparable to a price surge period. Artificial price suppression has instead stimulated market fear, triggering irrational jeonse price hikes. The process of deflating excessive bubbles is also not smooth. Landlords are struggling to prepare the jeonse deposits to return to tenants, and tenants are anxiously unable to move on time.

It is not that the Three Lease Laws have no positive effects. It is true that many tenants have benefited from being able to live for four years without the burden of rapid price increases. Nevertheless, laws that impose excessive burdens on only one side violate the principle of proportionality. Market instability caused by abnormal price fluctuations also remains.

The Three Lease Laws, which excessively control prices to the extent of distorting the market and overly infringe on the autonomy of contracting parties, must be revised and supplemented in some way.

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