RENTAL MARKET RESTRUCTURING IN SOUTH
KOREA
THE DECLINE OF CHONSEI AND ITS
IMPLICATIONS
Richard Ronald
University of Amsterdam & University of Birmingham
& Mee Yoon Jin
Land and Housing Institute, South Korea
THE KOREAN RENTAL SYSTEM
• The Korean miracle: from 3rd world to 1st in one generation
• Chonsei: deposits of 40%-70% of value & no monthly rent
– Informal banking for landlords; forced saving for tenants
– High quality entry tenure for future home buyers
– Virtuous ‘chonsei mechanism’: 1995 peak @ 63.6% of
rental sector, 29.7% of housing
• Wolse: monthly rent for very low income people
• Chon-wolse: hybdrid tenure
THE SHIFTING TENURE BALANCE
• While home ownership
growth has flattened…
• Chonsei declined 63.3% 47.3% of renting ( 1995-2010)
• Chon-wolse increased from
23.3% in 2000 to 37.9% in 2010
CHONSEI ‘SHOCKS’
DIMINISHING EFFICIENCY OF CHONSEI MECHANISM
Booms & bust represent problems
for tenants or landlords respectively
• Shock 1: house prices doubled
leading to more C demand &
upward price pressure
• Shock 2: AFC destabilized C,
undermined economic position of
landlords and capacity to return
deposits
• Shock 3: return of market overheating, forced government to reasses public housing
• Shock 4: chonsei price boom
compared to price volatility and
decline in home ownership
WHAT’S CHANGING?
Market shifts
• Increasing expectations of housing oversupply undermining housing as
speculative investment for landlords
– 500,000 units built a year since 1989 (80,000 public pa. since 2002)
• Volatility making chonsei more attractive to better-off would-be buyers
• Reducing access to both C and home ownership for lower-income HH
• chonsei prices increased from 40 to 60% on purchase prices 2006-2012
• Low interest rates & better returns elsewhere
– Chonsei-to-monthly rent conversion rate (CMR-CR) in 2011 was 9.3% (double
bank deposit rates of return)
• Landlords attracted to chon-wolse (less risky more profit)
– Chonsei ratio of new contracts fell 56.3% to 49.1% (2007-2010)
DEMOGRAPHIC SHIFTS
• Korea has more than 2.5 million landlords (many of whom are also tenants)
from 16 million households
• Many accumulated properties when they were younger - when prices were
lower - as speculation/investment strategy
• The chonsei-boom generations are now ageing and their needs shifting
Is a Korean Generation Rent Emerging?
100%
90%
100%
11.1
11
8.9
22.5
38.3
48
60%
42.1
34.9
34.3
Monthly rent
with deposit
40%
48
30%
22.6
Monthly rent
50%
50%
33.4
Chonsei
30%
27.6
20%
20%
10%
18.7
Free rent or
other
70%
60%
40%
12.2
80%
80%
70%
90%
38.7
39.3
36.8
Owner-occupied
10%
14.3
12.7
11.6
2000
2005
2010
0%
0%
29 years old and under
2000
2005
2010
30-39 years old
Figure: South Korean Tenure by age cohort
CONSEQUENCES
• Renting becoming concentrated (poorer, young, single)
undermining saving for & ascending the housing ladder
– first-time-buyers an average 37.5 years old in 2006 & 41.1
years old in 2012
• Low-middle income people pushed out of chonsei
– Ratios of low-income chonsei dropped from 18.8% 13.2%, middle-income hh 27.2% to 26.7%
– high-income hh increased from 24.2% to 27.7%
– Chonsei deposits an average 1.7 times tenant income in
2006 but 2.9 times in 2012
• More & more households stuck in Hybrid sector
– Squeezed by cost of renting & saving
– Ratio of families with rent-to-income ratios exceeding
30% increased 28.8 to 34.7% 2000-2006
– Chonsei Montly Rent Conversion Rate – (CMR-CR)
means families pay more for housing
CHONSEI CRISIS!
• Addicted to Chonsei:
– Decline of chonsei considered a threat to the
housing sytem?
– Aggregate of chonsei deposits is around 19.6 %
of total GDP, or 80% of total housing loans
– Creates stability and low LTV ratios
– Represents large potentially destabilising
speculative fund (money pours in an out)
– Undermines impact of policy & interest rate
adjustments
The Cloud
GOVERNMENT RESPONSES
• Chonsei loan schemes (drives up prices and individual debt)
• Public Chonsei housing schemes since 2011 (about 15,000 units pa.)
• Tax relief for landlords who buy to rent for 5 years (poorly targeted!)
• Bogumjari scheme 1.5 million social units (mixed tenure)
(see Ronald and Lee, 2012; Lee and Ronald; 2012)
• Housing allowance scheme about to be launched
KEY POINTS!
• Will Chonsei disappear?
• Housing sectors are certainly polarising:
homeowners & chonsei tenants on one
side & monthly renters on the other
• Different structres but similar outcomes
to European contexts: i.e. generation
landlord and generation rent