While most people in the world decide to rent or buy a property, Korea has a third option, Jeonse, an intermediate system that sits between monthly rent (wolse) and property (jaga). Jeonse is an apartment rental system in Korea where, instead of monthly payments to a landlord, a large lump sum payment is deposited for the duration of the contract. This deposit, also known as „key money“, is usually between 50% and 70% of the value of the property and is refunded to the tenant in full after two years. According to the law, jeonse is a two-year contract in which the tenant has the option to extend by two years. Shin has a hunch that the system may have been some kind of secret weapon that led to South Korea`s rapid economic development. Savings rates rose from the 1960s to the 1990s, in part, he argues, because people pushed back large sums of money for jeonse money. The system effectively passed this money on to Korean landlords, many of whom were also small business owners and entrepreneurs, and were happy to forego rent in favor of a lump sum to invest in their businesses. During the financial crisis of the 1990s, the system only took more root as it allowed South Koreans to bypass a deeply troubled banking system. The modern Jeonse we know today was first mentioned in the government`s civil law of 1959 and became commonplace throughout Korea beginning in the 1960s.
The system was born out of Korea`s lack of mortgages, soaring property prices, and the need for private financing. Jeonse acted as a private banking solution for an overheated real estate market, allowing landlords and tenants to benefit from a lease. From the 1960s to the 1990s, this private leasing financing contributed to Korea`s economic development. Not everyone can get as good a deal as Park, who was easily able to get a loan for the Jeonse payment, thanks in part to the solid salary he earns in the mobile advertising industry. (He declined to offer details.) But the jeonse`s current profitability is an obvious gain for tenants. Stagnant property prices in South Korea have prompted more potential buyers to hold back their purchases. Many of them opted for Jeonse apartments while waiting for the apartment to recover. This has boosted the demand for Jeonse apartments. And with the limited supply – landlords aren`t so keen to let all the sauce go to the tenants – Jeonse`s prices are rising. „Now the jeonse is kind of a problem,“ said Dongrok Suh, a Seoul-based partner at McKinsey and Company. Historically, there is evidence that similar plans were made on the Korean Peninsula during the Goryeo dynasty (918 – 1392), when farmers leased their land in exchange for goods or money. This exchange of land for money was then extended during the Joseon period (1392 – 1897) into a more sophisticated pawnshop system where landowners could lend money using their property as collateral.
The first official recording of a Jeonse Treaty in Korea was in a 1910 report from the Japanese government. A contract deposit (Gyeyakgeum) may be entrusted to the owner of the house at the time of signing the contract, as an expression of your obligation not to violate the terms of the contract. Since the amount of a contract deposit is determined by the lease rate, the more money is paid for the lease as Jeonse or Wolse, the larger the contract deposit will be. Special attention should be taken when it comes to a contract deposit, because if the terms of the contract are violated by the person renting the house, the owner does not have to return the money given as a contract deposit. The government is trying to wean South Koreans out of the Jeonse system through a series of political changes. He decided to make some of the ordinary rent payments tax deductible, thereby reducing the financial benefit of the Jeonse option. It also eases the tax burden on landlords to move more property owners from the Jeonse system to traditional leases. „By reducing the burden on those who pay monthly rent and reducing demand,“ Jeonse said, the Ministry of Land, Infrastructure and Transport said in a press release, „we plan to close the gap in the market and stabilize prices.“ With property prices rising at the fastest pace in nearly a decade, real estate is now a major political issue, and there have been calls for the current government to make policy changes to protect the Jeonses. As the government plans to stabilize the rental housing market by increasing the supply of housing across the country, we will have to wait and see if that is enough to bring prices down.
If the contractual agreement goes wrong, the Korean Real Estate Brokers Association office in your area or the regional court`s free legal advice window can tell you if you can potentially receive compensation. Jeonse DepositJeonse Deposit (jeonse bojeunggeum) is money that is temporarily given to the owner in exchange for the use of the house and is returned after the end of the contract. However, if the device was intentionally damaged, only a portion of that money can be returned, as some of it can be withheld as compensation. The view from the proverbial trenches is instructive. When Minwoo Park, a 33-year-old software engineer, rented his three-room apartment in Seoul`s Yeongdeungpo [QC] district, he borrowed the lump sum needed for a Jeonse contract from a bank. From his point of view, it made a lot of sense. Thanks to low interest rates, his monthly payment is about a quarter of what it would cost to rent a comparable apartment. „It`s a better deal,“ Park says. „Everyone prefers Jeonse.“ In addition, many landlords simply do not have the money to repay their tenants.
Citing a report by the Bank of Korea, The Economist recently noted that 10 percent of the country`s 3.7 million Jeonse homeowners may struggle to repay the money they owe tenants. In other words, they are stuck in the system because they have to find another Jeonse tenant to reimburse the previous resident. The current uncertainty surrounding jeonse has raised fears that the deposit-based system has no future in Korea. Jeonse leases, which initially benefit young people and low-income households, have become so expensive that people have little choice but to resort to more expensive monthly payment plans (Wolse). The owner must return the money specified as Jeonse only in the case of Jeonse leases. Also note that higher Jeonse payments are also siphoning money from the consumer sector – a problem at a time when south Korea`s economy is less than busy. „On the one hand, it`s a household rental system,“ says Hyun Song Shin, an economics professor at Princeton who studied Jeonse. „But in fact, it`s also an informal credit system.“ This does not bode well for consumption growth; As a rule, many consumer expenses are made in the first years of the creation of a family, when people buy houses and cars. And that probably won`t be solved by pushing the country further into debt. The high cost of living – including outsized expenses on jeonse payments and exorbitant education costs – is seen as one of the main reasons why young couples postpone marriage and have fewer children when they get married.
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