How Did the Housing and Urban Fund Inject Money into the Market [Real Estate AtoZ]

Ministry of Land's Housing and Urban Fund⑤
As Tenants Gained Easier Access to Funds,
Landlords Raised Jeonse Prices
Housing Prices Followed Suit

"This inevitably causes hardship for ordinary people, but it was a point where we had to break the cycle at least once. In the past, we increased lending under the pretext of stabilizing housing for the working class, but we have now reached a structural limit where we can no longer continue."

Bank of Korea Governor Rhee Changyong made these remarks last month during the National Assembly audit of the central bank, referring to South Korea's Jeonse system and Jeonse loans. He noted that as Jeonse loans increased, the household debt ratio also rose rapidly, and the real estate market was no longer in a normal state. What impact have Jeonse loans had on the nation’s housing market?

An apartment complex nearby is reflected in the Jeonse rental notice posted at a real estate office in downtown Seoul. Photo by Yonhap News

Interest Subsidies: The Secret Behind Supplying Dozens of Times More Liquidity

Unlike typical secured loans, Jeonse loans do not have tangible collateral. Instead, a guarantee certificate issued by a public institution serves as collateral. The Housing and Urban Guarantee Corporation (HUG), Korea Housing Finance Corporation (HF), and Seoul Guarantee Insurance (SGI)-all under the Ministry of Land, Infrastructure and Transport-provide these guarantee certificates. This means government policy directly influences the product.

The government has also directly injected funds through the Housing and Urban Fund. In 2015, the former National Housing Fund was restructured into the Housing and Urban Fund, and the supply of Bogeumjari Loans (Jeonse funds) was significantly increased. In the first year after the relaunch in 2015, Bogeumjari Loans amounted to 440 billion won, and by 2019, under the Moon Jae-in administration, that figure had grown to 885 billion won.

In addition, the government has implemented an interest subsidy program to bridge the gap between policy loan rates and private bank rates. For example, if a borrower receives a Bogeumjari Loan at 2% while the market rate is 4%, the bank provides the loan at 2%, and the government later pays the 2 percentage point difference to the bank using fund resources. For borrowers, this means access to funds at a low policy rate. For banks, there is no loss since the government covers the rate difference. For the government, issuing only a guarantee certificate allows it to claim it is supporting housing stability for ordinary people with minimal budget expenditure.

Interest subsidies are also used when repaying previously issued loans, making it difficult to accurately determine their total scale. However, it is estimated that this approach results in tens of trillions of won in additional liquidity being supplied to the market. Given that the typical difference between policy and market rates is about 2 percentage points, simple calculations suggest this creates leverage of about 50 times.

For example, if the fund provides 10 billion won and lends 1 billion won per person, 10 people benefit. However, if the 10 billion won is used for interest subsidies, the number of beneficiaries increases dramatically. If the policy rate is 3% and the market rate is 5%, the annual interest difference is 20 million won. Using 10 billion won from the fund to cover this difference allows 500 people to take out loans. If the rate difference is 1 percentage point, the number of borrowers increases by 100 times; if it is 3 percentage points, by about 33 times. This year, the budget for the interest subsidy program is set at 1.8398 trillion won, and for next year, 1.972 trillion won.

An expert who requested anonymity commented, "From the regulators' perspective at the time, it was a reasonable option because it allowed them to dramatically expand the number of beneficiaries using bank funds. However, in the end, it only exacerbated instability in the housing market, making it no different from administering morphine for years."

"Policy Loans Fuel Household Debt and Housing Price Increases"

Policy loans such as Bogeumjari Loans are mainly targeted at demand for relatively mid- to low-priced housing, such as multi-family, multiplex, and row houses. Without artificial capital inflows, Jeonse deposits would have remained low or even declined. However, continuous inflow of Jeonse loans has resulted in prices staying high relative to demand.

In particular, when landlords realized that tenants could access public funds, they began raising Jeonse prices. As a result, prices for non-apartment Jeonse properties at the lower end of the market gradually increased, pushing up prices for higher-end Jeonse units as well. Comparing the Korea Real Estate Board’s housing sales index and Jeonse price index, Jeonse prices, which had surged sharply since 2008, appear to have pulled up sales prices with a lag of about five to six years. Since the 2020s, both sales and Jeonse prices have soared.

Paek Dujin, Head of Real Estate Finance Analysis at the Seoul Metropolitan Government, pointed out, "As it became easier for people without homes to secure Jeonse funds through loans, Jeonse prices rose, and housing prices increased in succession. In the end, ordinary people fell into a vicious cycle of having to take out even larger loans each time they renewed their Jeonse contracts."

Villa-dense area in Yongsan District as seen from Namsan, Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

In fact, since the 2000s, with a prolonged low interest rate environment and low expectations for housing price increases, conditions had developed for the Jeonse system to gradually fade away. However, the continued existence of the system is largely due to the impact of Jeonse loans.

Recently, the scope of policy loans, which should be used to support ordinary people, has expanded to include high-income earners. For example, the special newborn Bogeumjari and Didimdol Loans (for home purchases) allow a combined income of up to 200 million won for dual-income households, covering the top 2% of earners. This means that the Housing and Urban Fund, originally intended for ordinary people without homes, is now benefiting high-income groups. According to data submitted to the National Assembly by Park Sunghoon of the People Power Party, 65.2% of outstanding Jeonse loans have gone to the top 30% income group. There have been persistent concerns that Jeonse loans are being used for "gap investment" (buying properties by leveraging Jeonse deposits).