Starting in July, the threshold for joining the lease deposit return guarantee will be raised for existing individual registered rental business owners as well. As the tightened standards that had been applied only to new contracts are expanded to renewal contracts for existing rental dwellings, rental business owners are expected to face heavier funding burdens. There are concerns that the non-apartment jeonse market will shrink further and the pace of conversion to monthly rent will accelerate.
According to the Korea Housing & Urban Guarantee Corporation (HUG) on the 19th, HUG will apply the tightened standards for joining the lease deposit return guarantee to renewal contracts of existing rental dwellings held by registered rental business owners starting in July. The lease deposit return guarantee is a guarantee product that rental business owners are required to join to ensure the return of tenants' deposits.
Currently, the 90% liability ratio standard is applied only to new contracts. However, going forward, the same standard will apply to renewal contracts, putting rental business owners in a position where they must reduce loan sizes or lower jeonse deposits to join the guarantee.
The liability ratio is calculated by adding the lease deposit and the amount of any maximum mortgage claim and dividing by the dwelling price. For example, for a dwelling with a market price of 500 million won, if the aggregates of the lease deposit and debts such as a mortgage loan exceed 450 million won, it becomes difficult to join the return guarantee. In effect, the combined amount of the jeonse deposit and loans must not exceed 90% of the dwelling price.
The applied ratio for officially assessed prices will also be tightened. For non-apartment multifamily dwellings such as row houses and multiplex units, the recognized ratio, which had been at 130% to 150% of the officially assessed price, will be lowered to 125% to 145%. Accordingly, for villas priced at 900 million won or less, whereas previously joining the guarantee was possible if the jeonse deposit was within 150% of the officially assessed price, going forward it will only be possible if it falls within 130.5% of the officially assessed price even without separate collateral loans.
HUG says the measure is unavoidable to reduce jeonse guarantee accidents. A HUG official said, "The application of tighter standards to existing rental dwellings comes after about a two-year grace period," adding it is "for the prevention of jeonse guarantee accidents and to ensure the soundness of guarantees."
The problem is the burden on existing rental business owners. If they fail to meet the requirements for joining the guarantee, it becomes difficult to join the return guarantee at all, and in that case there may also be constraints in finding new tenants. Ultimately, many rental business owners are likely to change their contract structure by lowering deposits and raising monthly rents, according to analyses.
In the actual market, the outlook that non-apartment units will shift to monthly rent even faster is dominant. Kim Hyo-seon, chief real estate expert at KB Kookmin Bank, said, "In the past, after the guarantee standards were tightened, there was a case where the monthly rent share in Seoul's non-apartment market increased rapidly," and added, "From the perspective of rental business owners, raising monthly rent in exchange for lowering deposits is likely to be a practical response." Kim added, "With tenants' recent preference for monthly rent overlapping, the pace of conversion to monthly rent could accelerate further."
There are also concerns that HUG's burden could increase. If some rental business owners fail to meet the tightened standards and are blocked from joining the return guarantee, it may become harder to secure new tenants, and ultimately cases of failing to return existing deposits could rise. In that case, situations in which HUG must return deposits on their behalf could also expand.
Rental business owners, who are facing pressure not only from the tighter guarantee enrollment requirements but also from loan recalls, may put their holdings on the market. However, many expect the stabilizing effect on the market to be limited. This is because a significant share of rental business owners' holdings are concentrated in villas and other non-apartment dwellings, where demand is insufficient. Kim said, "Listings may increase, but many are types of dwellings that are not easy for the market to absorb."