[Inside Chodong]Jeonse Phase-Out: Should We Resist or Prepare?

Jeonse Survives on Loans Despite Unfavorable Conditions
Government Led Jeonse Loan Expansion, Now Must Prepare for a Soft Landing

Will the jeonse system disappear as it is? Is it a natural extinction due to changes in the times, or is someone deliberately reducing it?

It is a fact that the number has declined significantly. In 2000, there were 14.3 million households in South Korea, with 28% living under the jeonse system, amounting to around 4 million households. According to recent statistics from 2024, the total number of households has sharply increased to 22.3 million, with 38% being tenants and about 40% of them living under jeonse contracts. This means approximately 3.4 million households currently use jeonse. Given that monthly rental contracts now account for 60-70% of new housing lease agreements, the number of jeonse households is likely to have declined further this year.

Jeonse is a unique Korean housing system, rarely found abroad, and reportedly existed even during the Joseon Dynasty. It played a distinct role after industrialization in the late 20th century. For young people with limited funds just starting out in society, it acted as a form of "forced savings" and served as a stepping stone for homeownership by minimizing fixed expenses. Until the Asian Financial Crisis, interest rates were quite high, allowing landlords to use deposits to grow their assets. For ordinary people, loans were difficult to obtain, so jeonse was considered a core part of the private financial system in Korea.

Entering the 2000s, with the end of the high interest rate era, there were growing predictions that the housing rental market would change. Discussions mainly revolved around a shift to monthly rent and the disappearance of jeonse. Bank interest rates, which once exceeded 20%, have long remained at the 2-4% level. For landlords, the incentive to offer surplus properties as jeonse has greatly diminished. The 2008 global financial crisis further dampened expectations for housing price increases. Around 2010, the conditions made it difficult to maintain jeonse supply, but the decline of jeonse was slower than expected. One key reason the system managed to survive despite seeming obsolete was the rise of jeonse loans. Although rental yields decreased for landlords, the increase in deposit amounts provided justification for maintaining jeonse contracts.

With rising tenant demand and easier access to financing, landlords had little reason to convert to monthly rent. As demand for jeonse rose and loans became more accessible, jeonse prices steadily increased. Jeonse loans are an artificial product, as they are provided based on public guarantees rather than tangible collateral.

Banks could easily operate by using public guarantees as collateral, and the government could create the impression of supporting housing for ordinary citizens without directly spending fiscal resources. The rest is well-known: increases in jeonse deposits fueled rising home prices. The artificially expanded jeonse market has also led to more disputes over deposit refunds, such as "empty jeonse" cases, and to social issues like jeonse fraud.

Although it is recognized that there are issues with jeonse loans, the system is so deeply rooted that it is difficult to tamper with. From a structural perspective, the problems caused by jeonse loans are clear, but for newlyweds and young people who struggle to find housing, the most urgent demand is for smooth access to loans (according to a housing status survey).

Because the jeonse system is strongly associated with affordable housing for ordinary people, the government has no choice but to be cautious in intervening. Even after the government set a policy to reduce public guarantees for jeonse deposits, it hesitated to implement it, fearing significant market shock. Nevertheless, since the government has played a leading role in sustaining the jeonse market through the "life support" of loans, I believe it should also take the initiative in addressing the side effects caused by such loans. If the extinction of jeonse is unavoidable, it is time to consider and provide a soft landing strategy.

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