Jeonse (), also known as chŏnse, key money deposit
or key money,
is type of a
lease
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...
or
deposit common in the
South Korea
South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korea, Korean Peninsula and sharing a Korean Demilitarized Zone, land border with North Korea. Its western border is formed ...
n
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
market. Instead of paying monthly
rent
Rent may refer to:
Economics
*Renting, an agreement where a payment is made for the temporary use of a good, service or property
*Economic rent, any payment in excess of the cost of production
*Rent-seeking, attempting to increase one's share of e ...
, a renter will make a lump-sum
deposit on a rental space, at anywhere from 50% to 80% of the market value, which is then returned at the end of the lease term. The owners make profit from reinvesting the jeonse deposit, instead of receiving the monthly rent. It is also possible to combine a lower jeonse with a lower monthly rent.
Operation
Jeonse involves the tenant giving the
landlord
A landlord is the owner of a house, apartment, condominium, land, or real estate which is rented or leased to an individual or business, who is called a tenant (also a ''lessee'' or ''renter''). When a juristic person is in this position, the ...
a large sum of "key money" when a
lease
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...
is signed. The amount of money required depends on the economy and the location of the property. Usually, the amount required is 50% of the property's value but can be as high as 60-80%. In 2014, it was reported that the average cost of a Jeonse in Seoul equals almost $300,000
USD
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
.
The tenant is then allowed to stay in the property "rent-free", not requiring any additional monthly payments, until the end of the lease, which is usually 2 years. Utilities and other costs (water, gas, electricity, cable, phone, internet, security) are applied for and paid by the tenant.
This system is popular with both consumers and landlords. First, there are very few
mortgages
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...
in South Korea,
so it is difficult for consumers to own a home. Also, real estate prices continue to increase so fast that some see the situation as a
housing bubble.The landlord makes a return by taking the deposit money and investing it and keeping all
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...
earned on the deposit. The tenant's deposit is protected by having a
lien
A lien ( or ) is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the ''lienee'' and the pers ...
issued against the property for the amount given. The entire deposit is then returned to the tenant at the end of the lease. The landlord can treat the deposit as a 0% interest rate loan to invest into other capital, which made jeonse especially desirable in the 20th century when interest rates were very high.
During times of lower interest rates, (월세), or monthly rent, is more often used. With a lease, a renter signs a lease for 1 or 2 years and makes a deposit on the apartment equal to perhaps 10% of the market value. The renter then pays monthly rent. In rare cases where damage has been done to the property, the damage has to be fixed to the landlord's standard before a landlord will return the deposit.
History
Origin
The jeonse system has origins tracing back over a century in Korea, some claim the arrangement began in the 19th century, spurred on by a treaty with
Japan
Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
,
but it became more popular and what it's known as today in the late 20th century, particularly in the 1960s and 1970s. The system was seen as a solution to a shortage of
mortgages
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...
, spurred on by high-interest rates, which dampens economic activity. This situation was compounded by the rapid
urbanization
Urbanization (or urbanisation) refers to the population shift from rural to urban areas, the corresponding decrease in the proportion of people living in rural areas, and the ways in which societies adapt to this change. It is predominantly t ...
and
rural flight
Rural flight (or rural exodus) is the migratory pattern of peoples from rural areas into urban areas. It is urbanization seen from the rural perspective.
In industrializing economies like Britain in the eighteenth century or East Asia in the ...
occurring, increasing the demand for urban housing. Jeonse facilitated economic development without traditional lending means, enabling urban growth.
Contemporary
The 20th-century era of high-interest rates and a shortage of mortgages is receding. South Korean interest rates for over a decade have remained low, at or under 3 percent. This has made the system less integral and beneficial to property developers than it once was, and has encouraged the increase in popularity of renting, wolse, rather than deposits. The newfound low interest rates have somewhat reversed the dynamic of jeonse, with now many tenants taking out loans for the deposit rather than savings, the interest on the loans each month can often be less than market-rate rent. However, this also means that rate hikes hurt jeonse, rather than help it as it originally did, since now it's the tenants who are borrowing money and therefore benefit from low rates.
Policy changes
The government has made active efforts to attempt to shift the housing market away from jeonse and towards wolse, increasing tax benefits to renters, such as tax credits, and removing some financial support from those who still opt for jeonse. In April 2022, monthly wolse contracts surpassed jeonse contracts for the first time, with renting at 50.4% and jeonse at 49.6%. Recent decreases in jeonse market share are due to increasing interest rates during
COVID-19
Coronavirus disease 2019 (COVID-19) is a contagious disease caused by a virus, the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The first known case was COVID-19 pandemic in Hubei, identified in Wuhan, China, in December ...
recovery, and government policy.
Risks
As Jeonse tenants are not obligated to pay any monthly rent, it may lead them to believe that Jeonse is a great deal in all aspects. However, there is a certain level of risks of which the tenants shall be aware for leasing an apartment by Jeonse.
Rising housing market
Jeonse tenants are taking a financial short position in the housing market. When the apartment price goes down the amount of Jeonse deposit goes down proportionally, although this may not always be the case. In such circumstances, the tenants will get the difference back when they renew the lease, at least in theory. However, if their landlords fail to provide the difference either with their own money or by taking a loan, the tenants are left with a few difficult options such as a lawsuit. On the other hand, when the apartment price goes up the deposit may go up as well, and the tenants shall fill the gap when they renew the lease.
During times of expansion in the housing market, or in cases of excess demand, there can be large hikes in the percentage of the property's value that the tenant must pay. This has been characterized as a crisis in the past, namely in the 1990s, where over a dozen people were driven to suicide in the face of these increases in deposit prices. Such extreme cases have been fixed in the past by large increases in the supply of housing.
Variable interest rates
It is a common practice that Jeonse tenants have the deposit ready by taking a loan from a bank due to the sheer amount of the deposit. If they take a loan with a variable annual percentage rate (APR), which is fairly common, they are exposed to the risk of rising interest rates. However, banks can provide a very low APR (2-4%) as the deposit may be taken as collateral.
According to the latest report by the
Bank of Korea
The Bank of Korea (BOK; ) is the central bank of the Republic of Korea and issuer of Korean Republic won. It was established on 12 June 1950 in Seoul, South Korea.
The bank's primary purpose is price stability. For that, the bank targets in ...
, the bank's household loan balance as of the end of December last year was 98.8 trillion won. Compared to the end of December 2019, there is an increase of 10 trillion won, the largest since 2004.
Dishonest landlords
Some landlords may have a large amount of overdue taxes. In such cases, the government may put the apartment up for auction in an attempt to collect the overdue taxes. When the apartment is sold, the government collects the overdue the profits from the auction.
최 훈. "집주인이 안 낸 세금, 세입자가 낸다?" 시사매거진 2580, MBC News. 2 May, 2016.
/ref> Since national tax (국세) and local tax (지방세) take a higher priority than the tenants, they may lose some or all of their deposit, depending on how much their landlords owe the government.
See also
*Key money Key money is one of several forms of payment made to a landlord. The term has various meanings in different parts of the world. It sometimes means money paid to an existing tenant who assigns a lease to a new tenant where the rent is below market. I ...
*Antichresis
Antichresis, under civil law and Roman law, is a contract whereby a debtor pledges (i.e., conveys possession of but not title to) real property to a creditor, allowing the use and occupation of the pledged property, in lieu of interest on the ...
, (''Anticrético'' in Spanish), a system common in Bolivia, due to limited access to credit.
*Mortgage loan
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...
References
{{Reflist
External links
South Korea's housing market strengthens
Economy of Korea
Real estate terminology