(Photo by Kim Tae-hyoung)
By Yu Sun-hui
A 60-year-old landlord, identified by the surname Park, was renting out a 25 pyeong (around 82.5 square meter) apartment in Seoul’s Mapo District for a key money deposit of 170 million won ($153,617) without monthly rent through the jeonse system. When a tenant’s contract expired this spring, Park announced plans to change the rental contract to a half-key money lease with a 100 million won deposit and monthly rent of 800 thousand won through the wolse system. The tenant moved out, unable to cope with the high rent. So severe is the key money and rental situation, however, that a new tenant occupied the apartment within two weeks. In South Korea, renters pay a huge sum of deposit money without monthly rent through the jeonse system, while in the wolse, renters pay both a small key deposit and monthly rental fee.
Park’s calculation in changing from a lump-sum key deposit contract to a partial monthly rent contract was simple. Putting the current 230 million won in key money into the bank would produce just 9.2 million won in yearly interest earnings, at a 4 percent per annum rate. But converting the arrangement to a deposit of 100 million won and 800 thousand won a month in rent would allow Park to receive 4 million won in interest earnings and 9.6 million won in rental income, for a total of 13.6 million won per year.
“I have to pay taxes and pay for repairs if there is a problem with the unit, so as a landlord I am going to prefer a monthly rental arrangement to a lump sum key money arrangement,” Park said.
As more and more landlords like Park prefer rent-added wolse arrangements to jeonse contracts, the latter are in increasingly short supply. Statistics bear out to shift in housing rental forms from jeonse to wolse monthly rental contracts. Published in July, the results of a Korea Research Institute for Human Settlements (KRIHS) survey of the 2010 residential situation showed that while the percentage of residents with monthly rental arrangements, including wolse contracts, rose from 18.3 percent in 2008 to 21.4 percent in 2010, that of jeonse contract residents dropped from 22.3 percent to 21.7 percent over the same period.
Underlying this rise in the frequency of monthly rental arrangements is a combination of low interest rates and the retirement of the baby boomer generation. From the standpoint of generally middle-aged and elderly landlords, it is substantially more economically beneficial to earn monthly rent than to receive a lump sum key money deposit at a time when interest rates are low. In particular, the demand for post-retirement funds among boomers who retired without making any particular provisions other than acquiring a single home is being mentioned as a factor fanning the increase in wolse arrangements.
Because of this, some observers are charging that a generation that built up assets through speculation during a past real estate boom is now leading the way in establishing a situation of high monthly rents in the housing rental market, with younger people serving as their scapegoats.
Land First President Park Won-gap said, “Up until the mid-2000s, when the real estate market was booming, the baby boomer generation certainly did accumulate wealth by taking out loans to buy houses and selling them off when prices rose to move into a larger place, or taking out additional loans to buy a new house.”
“Once they could no longer expect housing values to rise, they shifted from jeonse key money arrangements to wolse monthly rent arrangements, and the effects of the real estate bubble began to carry over to the younger generation in a kind of ‘kicking out the ladder’ phenomenon,” Park said.
The situation is merely punishing for a younger generation suffering under heavy rental costs. A newly employed 28-year-old named Kim who is living in a studio apartment with attached bedroom at a key money deposit of 20 million won and monthly rent of 600 thousand won through the wolse system said, “Every time I see in the news about how the jeonse contract is dying out and the wolse monthly rent contracts will take their place, I think to myself, ‘The 880 thousand won generation’ is going to have to give up all together on home ownership.”
More and more people belong to the same “rent poor” class as Kim. This term contrasts with “house poor,” which refers to people who have taken out excessively large loans to buy homes and are struggling to pay interest, let alone the principal. The “rent poor,” in turn, are people who are being weighed down by high rental costs, rather than being able to save money for a large lump sum and living rent-free.
With many landlords preferring the wolse monthly rental arrangements to the jeonse lump sum key money arrangements under the recent circumstances of low interest rates, a rapidly rising number of “rent poor” find themselves having to reduce their living expenses in other areas in order to bear the rent rates. In particular, the newly employed “880 thousand won generation” to which Kim belongs is finding it difficult to avoid the rent poor life as they suffer from irregular employment and low wages.
KS Economic Research Institute Vice Director Sun Dae-in said, “We can expect a further increase in the ranks of the rent poor, since the government’s so-called ’key money and monthly rental contract countermeasures’ consist of nothing more than giving tax benefits to speculators with multiple houses when they put key money and monthly rental units on the market.”
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