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The Jeonse system, sometimes called "key money" is one of the various systems in South Korea that people use to get access to incredibly expensive housing in li

by bane 4y ago

The Jeonse system, sometimes called "key money" is one of the various systems in South Korea that people use to get access to incredibly expensive housing in lieu of purchasing it. In a basic sense it's a long-term loan to the property owner, usually in the amount of 70-80% of the total property value, that you get back at the end of your lease. In exchange the following things happen: - The property owner get lots of cash they can use for investments. - The tenant lives rent free or at a very low rent considering the value of the property -- allowing them to save significant income for future housing or investment opportunities. - The tenant gets all of their money back at the end of the lease. The system is obviously surprisingly fragile, especially in a market that is in a downturn (the IMF period was a big one for example), or if the property owner over leverages the Jeonse money and can't pay it up at the end of the lease. Jeonses are typically viewed as a stepping stone for young families as they accrue their own savings in preparation to buy their own property to live in. It works because unlike renting, you aren't simply burning your money in a fire every month, you get it back and can add any savings made during the lease to that value to either find another place to Jeonse, or buy a property if you have enough. Mortgages of course exist, but aren't as favorable as they are in the U.S. and there are all kinds of ownership schemes/systems in place that would make the average American's head spin, often financed by the property developer instead of a bank. There is also insurance for the tenant, but as you might guess the terms are strict and getting a payout can be difficult. "Insurance fraud investigator" is not an uncommon job title. Of course this system has caused problems for housing supply and is considered a large part of why apartments in Korea are so expensive. A landlord can simply leverage jeonse after jeonse to acquire massive numbers of properties. Some recent laws put high property taxes on investment or "second" properties, but people find ways around those laws by using family members and friends to "buy" the properties. The state doesn't want to get in the business of repaying tenants as it would incentivize risky investments on the part of landlords, and the state's strategic interest is in increasing the housing supply to lower prices. Deposits don't sit in escrow as it's intended that the landlord is able to use that money to make themselves money to offset what would have been monthly rent payments. It's important to remember that from ~1953 to ~1997 or so, if you could get in a business or own any kind of property you could make incredible amounts of money. The market only moved up and there was virtually zero risk to this kind of property scheme. There was a brief "blip" from 1997 to 2003-2004 where it wasn't true, and then the market has basically been back to upward moving until COVID-19 hit again. So for maybe 3 generations, this has become the institutional way that real estate works and has made lots of people lots of money. It's slowly changing as high-yield investment opportunities disappear and the government cracks down on predatory property speculators -- but it's still a very common system that's unlikely to go away any time soon.

Eisenstein 4y ago
I don't understand how a mortgage is out of the question but they can come up with a lump sum of 80% of the property value. Where does this money come from? If they can come up with that and the market is great why not stay at YMCA and invest it for two years and get the entire sum to pay for the property? Your reasoning doesn't mesh with my way of thinking, which is obviously very different since I didn't grow up under that system, but it sounds to me like the tenants are getting screwed. Can you help me out?
- kijin 4y ago
  Jeonse money is usually borrowed, too. At a much lower interest rate than you would get for a typical mortgage, because the landlord effectively guarantees that loan. Until recently, it's been much cheaper to pay interest on a jeonse loan than to pay rent. Typical jeonse tenants start with savings equal to 10-20% of the value of the property. (To buy an apartment, on the other hand, they would need a down payment of at least 30-40% due to LTV restrictions.) They borrow the rest of the deposit from a bank. The landlord takes that money and adds their own loan to buy more houses, invest in coins, or whatever. So everything is leveraged at least twice. Of course this scheme all crumbles down when interest rates go up and property values drop.
- bane 4y ago
  There's all kinds of ways people come up with Jeonse money. But it's important to understand a few Korean cultural norms: - It's the general norm that people stay with their families well into adulthood -- often even after marriage and children (with "free" childcare from the grandparents). It's not as common for single adults to have their own property. [1] - Given this reality of households, families often pool their money for large purchases. Since Jeonse is "guaranteed" returned after a lease, it's low/no risk to individual family members, who all get a place to live as part of the agreement. It also lets people of a variety of economic circumstances all participate in getting high quality housing. - The average wage in South Korea is <$3k per month (in USD), while housing in the Seoul Capital Area (about half of the population) is at or near NYC prices: or about $10k-$30k per square meter. Most individuals, and even families, thus cannot afford an entire mortgage on their own, but can afford to both pool money and to secure Jeonse loans (which have a lower interest rate than mortgages as the landlord is the guarantor) at lower overall values. - Jeonse doesn't mean "lump sum for no rent", it's a sliding scale and many properties use Jeonse + some minimal rent. At the other end of the scale the typical Western style "deposit + full rent" is called a Wolse. - Crashing at a flop house/share house/whatever does happen, there's an entire industry of ultra-minimal cheap apartments, but both social stigmas and once a person gets married and has kids, you need more space quickly. It's not a perfect system, but during a fast growing economy coupled with a government strapped for cash, it allowed tens of millions of Koreans to move into safe and modern housing. Unfortunately, it's extremely fragile in any other conditions and has lots of downsides in nearly any other market condition. As the Korean state matures and growth slows, I expect it to slowly go away to be honest. 1 - With the exception of Officetels, which are tiny efficiencies meant for working professionals.

by bane 4y ago

Eisenstein 4y ago

I don't understand how a mortgage is out of the question but they can come up with a lump sum of 80% of the property value. Where does this money come from? If they can come up with that and the market is great why not stay at YMCA and invest it for two years and get the entire sum to pay for the property? Your reasoning doesn't mesh with my way of thinking, which is obviously very different since I didn't grow up under that system, but it sounds to me like the tenants are getting screwed. Can you help me out?

kijin 4y ago
Jeonse money is usually borrowed, too. At a much lower interest rate than you would get for a typical mortgage, because the landlord effectively guarantees that loan. Until recently, it's been much cheaper to pay interest on a jeonse loan than to pay rent. Typical jeonse tenants start with savings equal to 10-20% of the value of the property. (To buy an apartment, on the other hand, they would need a down payment of at least 30-40% due to LTV restrictions.) They borrow the rest of the deposit from a bank. The landlord takes that money and adds their own loan to buy more houses, invest in coins, or whatever. So everything is leveraged at least twice. Of course this scheme all crumbles down when interest rates go up and property values drop.
bane 4y ago
There's all kinds of ways people come up with Jeonse money. But it's important to understand a few Korean cultural norms: - It's the general norm that people stay with their families well into adulthood -- often even after marriage and children (with "free" childcare from the grandparents). It's not as common for single adults to have their own property. [1] - Given this reality of households, families often pool their money for large purchases. Since Jeonse is "guaranteed" returned after a lease, it's low/no risk to individual family members, who all get a place to live as part of the agreement. It also lets people of a variety of economic circumstances all participate in getting high quality housing. - The average wage in South Korea is <$3k per month (in USD), while housing in the Seoul Capital Area (about half of the population) is at or near NYC prices: or about $10k-$30k per square meter. Most individuals, and even families, thus cannot afford an entire mortgage on their own, but can afford to both pool money and to secure Jeonse loans (which have a lower interest rate than mortgages as the landlord is the guarantor) at lower overall values. - Jeonse doesn't mean "lump sum for no rent", it's a sliding scale and many properties use Jeonse + some minimal rent. At the other end of the scale the typical Western style "deposit + full rent" is called a Wolse. - Crashing at a flop house/share house/whatever does happen, there's an entire industry of ultra-minimal cheap apartments, but both social stigmas and once a person gets married and has kids, you need more space quickly. It's not a perfect system, but during a fast growing economy coupled with a government strapped for cash, it allowed tens of millions of Koreans to move into safe and modern housing. Unfortunately, it's extremely fragile in any other conditions and has lots of downsides in nearly any other market condition. As the Korean state matures and growth slows, I expect it to slowly go away to be honest. 1 - With the exception of Officetels, which are tiny efficiencies meant for working professionals.