Need for further intervention in South Korean property market
A recent article has outlined the need for the government to provoke a &lsquo;realignment&rsquo; of the South Korean real estate market and desirable policies including the alteration of deposit regulations and the capping of rent price gains. Despite 11 previous government measures, the country&rsquo;s property prices are inflating at an alarming rate, and now reports suggest that South Korea&rsquo;s economy is notably suffering due to mounting household debts associated with high rent costs, forcing consumers to cut back spending elsewhere.




Rent system must be realigned

The government under President Park Geun-hye trotted out 11 measures to stimulate the real estate market. It used all possible actions - increasing housing supplies, tax incentives and financial assistance. But they didn’t help much. Home trades have increased, but the working class has become more insecure about their living conditions. Tenants have to move every two years when their jeonse (lump-sum deposit) contracts end and they have little left to spend because of hefty rent cost. Sky-high rent fees have stifled consumption and economic growth and yet the government fails to come up with an adequate solution.Rent prices in Seoul have shot up 64 weeks in a row. Rent is now more expensive than actual home prices in some apartments in Seoul. Skyrocketing rent prices have aggravated household debt and sluggish consumption, hurting the overall economy. The vicious cycle could go on until it wrecks the economy. The Hyundai Research Institute cited recent prices as one of the causes of the economic depression, along with an aging population, decreasing jobs and income inequality.The ridiculously high rent prices have already taken a heavy toll on the economy. According to the statistics office, monthly rent expenditures grew on average 73,900 won ($62) in the April-June quarter, up 21.8 percent year on year. Household spending in the second quarter tumbled 71.6 percent to the second-lowest level since statistics were tracked in 2003.To fix the problem, the fundamental cause must be addressed. The jeonse system, where tenants pay a large lump deposit for a living arrangement for one or two years, is a unique rent system in Korea. The arrangement was established when the country’s ports were forced to open by the Japanese in 1876 and the population became dense around the capital. In exchange for using the house for a year or two, the tenant must pay deposit tantamount to 50 percent to 80 percent of the value of the house.The arrangement lasted because real estate value continued to generate profit, thanks to high interest rates in Korea. But the formula that sustained the legacy has broken down since the 2008 global financial crisis. Landowners preferred monthly rents after interest rates went down to record-low levels. The transition came fast. About half of contracts are now offered on a monthly basis, compared to three to four years ago. Monthly-basis rent will likely be the majority arrangement next year.Government efforts to solve the problem have not worked because of low interest rates. Authorities must change their mindset. The rent crisis must be solved for social welfare. In Singapore, for example, 80 percent of homes are public supply. The government provides cheap rent accommodation for low-income tenants.The supply policy must be realigned to focus on tenants immediately. Capping rent price gains and giving tenants the right to demand extension in contracts would also help. The state could also regulate rent price growth. Emergency times require emergency actions. JoongAng Ilbo, Sept. 12, Page 26