[Opinion] A Crisis Approaches as Jeonse Prices Strengthen

Recently, the housing market has been in turmoil. Since last October, the real estate sales market has begun to decline again, but the jeonse market remains strong. This is a decoupling between sales and jeonse. It can be summarized as a phenomenon where demand waiting for sales stays in jeonse.

With high interest rates persisting and uncertainties arising that next year's economic situation will not be favorable, actual buyers are shifting their demand from sales to jeonse. For this reason, the jeonse price increase rate is higher than the sales price increase rate. This is also the interpretation of the Korea Real Estate Board.

Currently, jeonse can be financed through loans, and the interest rates on jeonse loans from internet banks have dropped to the mid-3% range. This is far below the market's monthly rent yield. The typical monthly rent yield, or the jeonse-to-monthly rent conversion rate, is maintained at 4.8?5.0%. If jeonse can be financed at 3%, it is natural for the market to choose jeonse over monthly rent.

In fact, jeonse prices more than doubled between 2008 and 2016. At that time, the jeonse loan limit rose from 100 million KRW to 200 million KRW and then to 500 million KRW. Even if the current loan limits remain unchanged, the low interest rates suggest that the strength of jeonse financing will continue for the time being.

The government has responded to household loans with a regulatory-only approach this year. After the household loan ratio in Korea touched 105% of the Gross Domestic Product (GDP), continuous regulations have been applied. If the loan growth rate remains lower than our economic growth rate in a broad sense, the debt-to-GDP ratio will decrease.

However, households tend to sharply reduce loans but then significantly increase borrowing by 5 trillion KRW per month when applying for 50-year mortgage loans, making management difficult.

The housing market slowdown at the end of this year ultimately comes from demand contraction, and since demand is money, the decrease in loans is a major cause of demand contraction. However, in the case of jeonse, since there is no demand contraction, the strength of jeonse continues while sales prices show a downward trend.

More fundamentally, housing is a cash flow-generating asset that produces rental income. As jeonse rises, it eventually puts upward pressure on asset prices. If the rise in jeonse is left unchecked under the pretext of affordable housing, there is no guarantee that a rental crisis like the one in the second half of 2020 will not recur.

Therefore, from the perspective of household loan management, appropriate regulations seem necessary for financial institutions that artificially offer excessively low jeonse loan interest rates and expand lending.

Ultimately, whether it is jeonse or sales, they grow by consuming money. Currently, over 80% of household loans are subject to the Debt Service Ratio (DSR), but jeonse loans are exempt. Although exempted under the name of affordable housing, financial institutions have exploited this weakness to actively develop bait products, which has led to the massive strength and expansion of the jeonse market.

These factors potentially cause an increase in jeonse fraud and other jeonse-related damages. Therefore, financial authorities should strive to stabilize the market through liquidity management. It is important to remember that the market ultimately grows by consuming money.

Chaesangwook, CEO of Connected Ground

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