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War on property speculation moves to jeonse

Jan 17,2020
The war on the property market continues, with the administration now taking aim at jeonse, long-term rent deposits.

Starting Monday, apartments valued above 900 million won ($775,000)will effectively be barred from the jeonse system as relevant guarantees are no longer being allowed. Certain other jeonse financing will also be prevented under the new rules.

In the jeonse system, a person taking the lease makes a large lump-sum payment, which is returned to them without interest when they vacate the apartment at the end of a fixed term.

The measures jointly announced by the Ministry of Land, Infrastructure and Transport and the Financial Services Commission (FSC) on Thursday are a follow-up to real estate measures announced on Dec. 16. The running count of anti-speculation measures under the current administration as of that time was 18.

The government said the goal is to end so-called gap investment.

In gap investments, investors purchase a property while inheriting the jeonse contract of the tenant living in the apartment. This allows the buyer to own the property with little capital.

The investor hopes to profit from the rising property values.

Many investors have been seeking jeonse loans in order to fund their gap investments, as they are less restrictive than mortgages. The administration has been tightening the rules for mortgage financing.

Starting Jan. 20, Seoul Guarantee Insurance will no longer guarantee jeonse loans to those who own apartments valued at over 900 million won.

This is an expansion of existing restrictions. The Korea Housing Finance Corporation and the Korea Housing & Urban Guaranteeing already prohibit jeonse for apartments valued above 900 million won.

Seoul Guarantee Insurance is a private company.

While unsecured jeonse loans are possible, 98 percent of jeonse loans are guaranteed by one of the three housing insurance companies.

“The housing units whose values are below 900 million won will not be affected,” said Lee Myung-soon, financial consumer director-general at the FSC. “The goal is to prevent gap investment using jeonse loans.”

Only one exception is being allowed. If a family is relocating to a different area for a new job, their children’s education or taking care of elderly parents, they are exempt from the rules even if they have an apartment worth more than 900 million won.

“For example, if the husband has to get a jeonse apartment in relocating to Busan because of a job while the wife and children remain in Seoul,” Lee said, the family must prove that they are living in both the jeonse apartment and the apartment that they own.

The new measure comes just two days after President Moon Jae-in’s New Year’s press conference, where he reaffirmed his determination to continue his campaign against real estate speculation.

Moon said the government will “endlessly” rollout additional measures if it considers the effects of existing measures weakening.

He said his goal is not to simply stop the housing prices from rising further but actually bring down the prices to the level before the sharp increase in recent years.

Vice Land Minister Park Sun-ho in a radio interview on Thursday backtracked on claims made by Blue House Secretary of Political Affairs Kang Gi-jung that the government is looking into requiring real estate purchasers to get prior approval from the government.

“[The government] has not reviewed [real estate purchase permissions] in detail,” the vice land minister said. He said that Kang was simply taking note of comments by experts on such restrictions.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]