After Rhee Chang-yong, governor of the Bank of Korea, kept the benchmark interest rate unchanged this month, his remark about "abolishing the jeonse system" has been making the rounds in the real estate market. The "jeonse system" is a lease system unique to Korea, and arguments for and against maintaining the system have continued for a long time. However, since anxiety has risen in the sales and lease markets after the Oct. 15 measures, many say the currency policy chief's comment is somewhat unrealistic.
Rhee held a press briefing on the 23rd after finishing the Bank of Korea's monetary policy committee meeting and said, "Even if it brings pain, we should carry out structural reforms in the real estate market, such as cutting off jeonse."
This is not the first time Rhee has mentioned abolishing the jeonse system. On the 20th at the Bank of Korea's parliamentary audit, he also strongly pushed for it. Appearing at the audit, Rhee said, "If we do not change the jeonse system, leverage could increase." He also said, "We will not play a role in stoking the real estate market by further increasing liquidity." the Bank of Korea's monetary policy committee kept the benchmark interest rate unchanged this month at 2.50% per year.
Rhee's remarks can be seen as appropriate for the head of the Bank of Korea (BOK), which is tasked with price and financial stability. Rhee is also an economist who has long conducted research at the International Monetary Fund (IMF) and the Asian Development Bank (ADB). This is because jeonse ties up large lump-sum funds in housing and restricts consumption, and it has been used as a tool for "gap investing (purchases with jeonse in place)," affecting rising home prices. Also, jeonse loans account for a significant portion of Korea's household loans. According to the Financial Services Commission (FSC), as of the end of last year, the size of Korea's jeonse loans was about 200 trillion won, more than quadruple from 2015 (46 trillion won). During the same period, the overall household loans growth rate averaged 5.8% per year.
Park Sang-hyun, a researcher at iM Securities, said, "Jeonse is a unique housing culture in Korea that requires a considerable lump sum," adding, "By that, I think he meant that gap investing and jeonse loans also hinder overall financial stability."
However, in the real estate market, some say Rhee's comments are somewhat out of touch with reality. While correct from the perspective of macroeconomics and financial stability, criticism is rising that the comment overlooks tenants' realities. This is because a young person living on monthly rent becomes a salaried worker, saves a lump sum to move into jeonse, and during that period saves more through deposits and investments to buy a home—an ordinary, common path to homeownership for the general public. In this process, "jeonse" has served as a kind of "housing ladder."
A real estate brokerage official said, "People living on monthly rent hope to save a lump sum to move into jeonse," adding, "From their perspective, it is an earnest desire to reduce housing costs."
To find the origins of Korea's jeonse system, one must go back to the Joseon era. From the late Joseon period, there were "ipjeon (立田)" and "seip (貰入)," under which one paid a certain amount to obtain the right to use land or houses. After Korea's liberation in 1945, housing supply was absolutely insufficient as the entire country lay in ruins. At that time, it was commonplace in the private market to pay a lump sum and borrow a house interest-free for a set period. Since bank interest rates were very high and loans were hard to obtain, landlords could invest the jeonse deposit in deposits and the like to earn revenue, while tenants could live without a monthly rent burden, making it mutually beneficial.
As industrialization and urbanization progressed in the 1960s to 1980s, the populations of major cities, including Seoul, surged. Bank interest rates remained high then as well, and jeonse took root as an "interest-free housing finance system." The Housing Lease Protection Act was also enacted in 1981. After the 1997 foreign exchange crisis, asset owners preferred monthly rent to secure liquidity, and jeonse gradually decreased. Tenants struggled at the time due to a jeonse shortage. In a sense, jeonse functioned as a kind of "housing stability device." "Gap investing" began in the 2010s, as investors flocked to buy homes in key areas during periods of sharp price increases.
Recently, as jeonse has declined and banjeonse and monthly rent have increased, there are concerns that housing insecurity for people without homes is deepening. According to the Korea Real Estate Board (KREB), last month the average monthly rent for Seoul apartments (based on sample households' rent excluding deposits) rose to 1,443,000 won. That is up 7.4% from January this year (1,343,000 won. After the Oct. 15 measures, with all of Seoul and 12 places in Gyeonggi designated as land transaction permit zones and regulated areas and end-user requirements strengthened, jeonse listings are expected to decrease further. Move-in supply is also expected to plummet. According to Real Estate R114, Seoul apartment move-in volume (excluding rentals) will fall to 17,687 households next year, 10,113 households in 2027, and 8,337 households in 2028.
Park Hap-su, an adjunct professor at Konkuk University Graduate School of Real Estate, said, "For the time being, the trend toward banjeonse and monthly rent will be pronounced, but it is not a situation where jeonse will disappear," adding, "Not every landlord has the capacity to return jeonse deposits and convert to monthly rent."
He added, "It is true that idle funds being locked in real estate negatively affects the broader economy," and "However, I hope more attention is paid to the fact that supply is set to plummet, taking into account Korea's unique housing culture and history."