Shifting from jeonse to monthly rent is an unavoidable and natural trend; setting a ceiling on jeonse prices and monthly rent will prompt jeonse prices and monthly rent to spike even more before its introduction and weaken the supply

August 22, 2013 Leave a comment

2013-08-21 17:16

Housing woes

Fundamental solution is to help boost transactions 
Alarmed by President Park Geun-hye’s repeated instructions to combat the latest housing problem, the administration is busy mapping out new and viable measures. As this page pointed out earlier, however, there is no magic solution to the problem arising from drastic changes in our housing market.
The most urgent problem is that prices of ”jeonse,’’ a property rental system unique to Korea under which tenants pay upfront instead of monthly rent, are going up steeply in this summer off-season. If this trend continues, there could be tremendous turmoil in the fall housing relocation season.The reasons behind the latest housing distress may be simple ― rising demand for jeonse homes amid the protracted real estate slump and falling supply of jeonse units amid long-running low interest rates. The fact is that more people shun buying houses in anticipation of a further drop in home prices and instead opt for rented homes ― preferably those leased under the jeonse system because of burdensome monthly rental costs.
At the same time, low interest rates have prompted homeowners to shift to monthly rent for higher rental income. At present, monthly rent is formed at 4.5-6 percent of home prices, and homeowners can make more profits from monthly rent, given that bank deposit rates are much lower. The government’s flawed policy on expanded loans for jeonse tenants is to blame for the jeonse price surge. As jeonse loans increased, more people have chosen to delay buying homes.
President Park was right in this regard to urge her Cabinet ministers to put top priority on turning demand for jeonse houses into that for home purchases. But this is easier said than done, given the severity of the property market slump.
It’s for this reason that the foremost remedial measure should be to normalize housing transactions. To this end, the ruling and opposition parties must hurry in passing bills pending at the National Assembly such as lowering home acquisition taxes for good and abolishing heavier capital gains taxes on multiple homeowners.
Needless to say, the government needs to work together to supply more public rental houses and provide tax incentives for tenants, especially those living in monthly rented houses.
As a fundamental measure to tackle the latest housing problem, the main opposition Democratic Party proposed introducing a system that sets a ceiling on jeonse prices and monthly rent. But if the past is any guide, the system will prompt jeonse prices and monthly rent to spike even more before its introduction and weaken the supply of new rented homes.
In a sense, shifting from jeonse to monthly rent is an unavoidable and natural trend. There’s no need to obstruct the flow by force. What’s needed is for the government to come up with measures tailored to fundamental changes in our housing market.

Filed under Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment