South Korea Thought Its 'Jeonse' Were the Magic Formula for the Rental Market, Until the Scams Began

The idea is certainly tempting: Live in an apartment for two, three, or even four years without making a single monthly payment in exchange for giving the landlord a deposit that's returned at the end of the contract. It sounds like real estate science fiction, but South Korea’s housing market has used a similar formula for years. People even have a name for it: “Jeonse,” which for a while was like making the impossible a reality for landlords, tenants, and even the country’s economy.

Today, however, more South Koreans view the jeonse with suspicion. The reason? Some have abused the system or directly used it to commit fraud.

What are jeonse? It’s a unique way of approaching the real estate market that has become quite popular in South Korea, as opposed to conventional buying, selling, or renting. The idea is quite simple: The tenant gives the landlord a certain amount of money as a deposit in exchange for using their property. However, there are two conditions. The first is that the owner can use this cash to get the most out of it. Secondly, at the end of the rental period, the landlord returns the amount to the tenant—a win-win situation.

The fine print. Logically, jeonse have fine print, and some clauses are beyond the reach of most tenants. According to the research firm Acuity, to “rent” under these conditions, the tenant must give the landlord a substantial deposit, ranging from 50% to 80% of the property’s market value. This deposit can amount to hundreds of thousands of dollars. Typically, tenants pay 10% in an initial deposit and then the rest when they move in. The tenant gets all that money back, but not until a few years later, when the lease ends. In 2021, leases were set for two years with an option to renew.

What are the benefits? For the tenant, the advantages are clear. With a jeonse, instead of paying monthly rent, you deposit a considerable amount of money. That way, you don’t lose any of your accumulated savings and can continue to earn money to eventually buy your home. “Many Koreans see jeonse as a more economical housing expense than monthly rent and a pivotal step in achieving the dream of homeownership,” the Asia Society, a non-profit think tank, states.

The formula is also appealing to landlords because they can use the money during the lease term. They can put the interest-free loan in a high-yield bank account or use it for other investments. The goal is to make it as profitable as possible. As Acuity explains, “Instead of collecting monthly rent, the landlord can reinvest this full amount.”

What are the origins of jeonse? The jeonse is one of the rental formulas in South Korea, where people also use the weolse, which is more like a conventional lease, including a deposit and a monthly rent. If the jeonse formula has triumphed in the South Korean real estate market, it was due to a combination of factors, and the first is probably cultural.

Centuries ago, during the Goryeo Dynasty, the landlords used a similar system to lease land to Korean farmers. The second essential factor is historical and economic. The Civil Law of 1959 cited the jeonse system as it’s known today. It became popular in South Korea in the 1960s, coinciding with a period marked by a decrease in mortgage loans and rising prices.

A valuable investment. “Jeonse acted as a private banking solution to an overheated housing market, allowing landlords and tenants to benefit from a lease agreement,” Asia Society recalls. Until the 1990s, the formula was used partly to stimulate the country’s economic development. Other sources point out that a third factor to explain the system's popularity is high interest rates.

“[Jeonse] adoption has spread amid rapid urbanization, mainly due to the constraints of the housing finance market. Amid high interest rates and weak housing finance, landlords use the jeonse system to quickly access substantial amounts of cash. From the perspective of a renter, the cost of living using the jeonse system is lower than if rent was paid monthly,” Acuity notes.

A well-received formula. Renting without a lease and massive deposits accessible to landlords was attractive enough to win over a massive portion of the South Korean market. In 2021, the Asia Society estimated that 70% of leases in Seoul used jeonse. KOSIS shows that the formula was almost equal to monthly rent with a deposit across the real estate market in 2012.

Losing fuel. But as the years go by, the jeonse seems to be losing ground in this sector. The Korea Times recently published an article on its decay: According to its data, only 46.9% of the 123,669 leases signed in Seoul, the South Korean capital, between January and March were part of the system. That’s a significant percentage, but it marks the lowest level for the start of the year since 2011, when the authorities began collecting data. In 2020, the figure was 61.6 %.

The Korea Times also notes that the loss of ground for this leasing formula is particularly evident in the case of “villas,” small five-story residential buildings. In this niche, the jeonse accounted for only 36.3%, compared to 59.1% for apartments.

From theory to practice. While they're still important in the real estate industry, jeonse is less relevant than it was several decades ago. In recent years, the media has reported tenants demanding their deposits back at the end of their lease. Sometimes, they speak directly of scams that left them in ruin, with debts that, in the most tragic cases, have led to suicides.

Last October, The Korea Herald reported that between January and July 2023 alone, the number of victims of rental housing fraud reached nearly 4,500, with damages amounting to about $376.5 million. The outlet also notes that, at least to some extent, these frauds have alarmed tenants, reducing the jeonse in Seoul.

“As housing prices fall, the ratio of monthly rent has surpassed that of jeonse contracts, largely due to the increased risk of not receiving the full lease deposit back. However, the burden of having to pay rent every month will disproportionately affect the working class,” the firm R114 warns. Those affected not only lose their savings but also take out bank loans to cover the deposits required by the jeonse, intending to repay them gradually, confident that they’ll recover them at the end of the lease.

“My dream of owning a home has vanished,” Park Hyeon-su recently told AFP. The 37-year-old worked long hours and did everything in his power to manage to raise $73,000 and put down a deposit. After handing over the money, his so-called landlord vanished. “And I’ve given up on dating, not to mention getting married or having a child.” In another case, the owner of the rented house sold it and disappeared with the deposit. When it comes to villa rentals, nearly 2,000 people have experienced from “jeonse fraud” over the past few years.

The law offers some security to tenants, covering them with lease insurance. Still, The Korea Times points out that not everyone is eligible for such insurance because of their peculiarities. This is one of the reasons why the formula has lost more ground when it comes to the renting of villas, for example. South Korean authorities have moved to make it easier for owners to return deposits after renting.

The sum of factors. Fear of fraud or failure to recover deposits isn’t the only factor explaining the jeonse’s plunge. While it’s an essential aspect, even recognized by the government, there are others at play. For example, during the South Korean financial crisis of 2007 and 2008, when interest rates fell, landlords had less incentive to ask for large deposits to put into savings accounts. In such cases, they may prefer monthly contracts, which are more like what we’re used to in other parts of the world.

In 2021, the Asia Society noted that the situation will be similar, with benchmark interest rates below 1%. Another factor that may make them less attractive to landlords is the longer duration of the contracts, which can be last two years with the option of renewal. A third key factor is the property’s price, which is related to the size of the deposits.

Image | Unsplash (Chinh Le Duc)

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