On July 10, 2020, the government introduced the "Three Leases Act", a comprehensive law designed to stabilize pricing and increase supply of affordable housing in the nation’s real estate market. The actions come as prices in some parts of Seoul and the surrounding metropolitan area have continued to rise, making it unaffordable for some families purchase or even to remain in their homes. The changes included measures to control Jeonse conversion rates and plans to reduce the acquisition tax for first time home buyers. The new law also assists low- or no-income earners with their housing shortages by expanding the number of public housing options available. While on the surface these changes seem well intentioned, responses to the new law have been mixed, with some welcoming the news and others saying it will exacerbate a lot of the existing housing price problems.
|▲ The picture explains about 'Three Leases Act'. (Photo from Korea Association of Realtors)|
Under the new law, if landlords decide to switch their property agreements with tenants from a Jeonse (long-term rent in the form of a lump-sum deposit) to a lower Jeonse plus monthly rental fee, the rate of calculation of that monthly fee would be specified in the enforcement decree of the new Housing Lease Protection Act. The government set this level at the "basic interest rate plus 3.5 percent." This means that with the current interest rate set at 0.5 percent, a 4.0 percent conversion rate would apply to all monthly rental fees. In other words, tenants with a Jeonse deposit of 100 million won would have to pay 4 million won a year in non-refundable rent or about 330,000 won per month. In response to the government set fee, many speculated landlords would increase their basic Jeonse rate, so that they could earn more monthly rent.
To combat these fears, on July 6, the government pushed to lower the conversion rate in order ‘to prevent a rapid changes in rental rates after the introduction of the Three Leases Act. The Minister of Land, Infrastructure, and Transport Kim Hyun-mi considered lowering the current conversion rate to 2 percent. This would mean landlords would be unlikely to earn more than their existing loan rate, while at the same time reducing the burden on the working class. However, critics of the planned decrease argued that a lower conversion rate will only further reduce the supply of affordable housing available for tenants as landlords see their rental income drop by half, leading to speculation that they will protect themselves by increasing the original Jeonse investment, causing housing process to soar yet again.
In addition, prior to the ‘Housing Lease Protection Act’, consumers argued there were no appropriate laws protecting tenants from greedy landlords. Under the new act, this problem has not changed since it falls under civil law, meaning there is no way to enforce administrative punishment for violations. When a tenant has a complaint against a landlord, they must file it with the Rental Housing Dispute Mediation Committee. However, the decision of the committee is not enforceable leaving the tenant with the only option of suing the landlord, spending more time and money resolving the issue. So, while the new law will, on the surface, lift the burden off tenants, if a landlord chooses to disregard it, the tenant has very few weak recourses to fight the injustices.
|▲ The monthly rent volume decreased from five years ago, but the volume of small households increased.(Photo freom Yonhap news)|
To find out how other governments have dealt with these kinds of problems, The Dankook Herald (DKH) investigated tenant protection laws in other countries. Korea is the only nation that uses a Jeonse system. In all other countries people either rent or buy properties. There are laws governing both methods, but they vary from nation to nation. In France tenants pay non-refundable monthly rents whose rate are controlled according to the Rent Reference Index (IRL). The purpose of this index is to provide tenants with a guarantee that rents will rise with market trends instead of at the will of the landlord. Moreover, it provides landlords with a guarantee of a high level of maintenance, so as not dissuade them from investing in rental housing. According to French law, rent can be increased only once a year and the conditions for review should be specified in the contract. Increases are usually calculated based on a construction cost index published annually by the government. In the U.S. state of New York, landlords are not allowed to refuse to renew rental contracts or to permit forceable evictions, as long as the tenant continues to pay their monthly rent, unless the landlord plans to occupy the dwelling themselves. The Maximum Base Rent (MBR) is increased every 2 years by a percentage determined by the Division of Housing and Community Renewal (DHCR). The MBR can also be increased with Major Capital Improvements (MCI) increases.
The government has attempted to control the conversion rate for Jeonse to monthly rent to ease the burden on tenants, but it should be aware that lowering the conversion rate excessively could cause Jeonse prices to soar in the long run. While their vision may have been based on good intentions, the results could prove catastrophic for an already overburdened tenant. With their approval ratings dropping, it seems like now is a good time to monitor housing market prices and respond appropriately to any resulting instability.
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