Continuing Rise in Seoul “Jeonse” Prices Leads to Boom In Apartment Sales
Here is a long, but interesting article about what is going on in the Seoul real estate market in regards to the jeonse rent system that continues to see higher prices which is causing renters to instead become buyers. This is in turn is making the jeonse rent go even higher and causing apartment shortages:
Up until last fall, 39-year-old office worker Kim Ji-seok was renting his apartment in Nowon District, northern Seoul under a jeonse agreement, a long-term deposit contract that is usually guaranteed for two years.
At the end of the summer, however, he bought a 59 square-meter apartment nearby for 320 million won ($267,468).
He decided to buy a house after his 220 million won jeonse rose nearly 30 percent to 280 million won in just two years. “I had to borrow 50 million won from the bank just to renew my jeonse contract,” Kim said. “I just decided to buy an apartment of my own as it seemed the jeonse price would again go up after two years.”
The housing market last year saw all-time record transactions as people like Kim, who were living on jeonse agreements, decided to finally buy an apartment. [Joong Ang Ilbo]
You can read the rest at the link.
What the article fails to mention is exactly how it is possible for Low-Level Officeworker Kim to afford an apartment that would require two thirds his monthly income for 30 years to pay off.
The magic solution to this impossibility is the interest-only loan… with the idea that paying intetest on borrowed money for jeonse and paying intetest on a bit more borrowed money for “ownership” are about the same thing… except a rise in property value becomes personal “profit” instead of profit for the landlord… who is making that profit with one third of the investment by getting a renter to offset his interest-only loan with a jeonse payment.
This little bubbling scheme works as long as interest rates are low and apartment prices keep going up… which a calculator indicates can’t happen.
This all smells of a housing crisis… which will result in a lot of people stuck “renting” their upside-down apartments from the bank with no hope of selling or paying off… and with a big debt if they walk away… making them better off if they had remained with the jeonse system.
There a couple of ways to get really rich if one had a full understanding of this situation and could put any feelings of humanity aside and become a true predator.
It’s funny that this same sickness has spread almost coincidentally with the spread of MBAs, don’t you think?
But only a really paranoiac mind would ever imagine it was planed as a type of Cloward-Piven strategy…
Sad. Really sad. The dreams of so many ruined by placing their faith in material things.
The reason is he never paid interest before. Parents also gave him money. He likely lived at his parent’s home hoarding his salary for years to pay the initial jeonse price. The problem is every two years the landlord can do what they want and ask for a much higher jeonse. Or decided on monthly rent. Instead of borrowing any paying interest to rent, he decided to buy. Under jeonse the market has no patience for dips and every year a good percent of the country cares about the current price of real estate. In the US people move less often. The problem with the jeonse system is the government will never want prices to go down, but they and apartment prices are too high for people to afford. Basically jeonse is just giving rich people the ability to make poor people take out loans for them to invest and the person lives in their property in exchange for the loan. It’s goofy. It used to be fine. The jeonse renter gets all their money back, no interest and no monthly rent that goes out the window. Eventually their jeonse sum turns into a lot of cash to buy their own place.