During the winter of 2022, hundreds of South Korean citizens were faced with the very real possibility of losing their rental home deposits, known as jeonse. Issues relating to fraud and corruption on a massive scale at the hands of mega-landlords rose to the surface. Most prominently, one of the “Villa Kings,” a group of landowners participating in a jeonse scheme, suddenly passed away, leaving hundreds of his tenants with little chance of receiving their deposits back. Rather than representing a standalone case, the man’s death led to government intervention in the form of subsidies and investigations, which quickly revealed the immense scale of the real-estate problems.

The Villa King case seemed simple at first glance. A man purchased dozens of properties through shady means and collected deposits of up to 250,000 United States dollars (USD). However, when he died, the money was nowhere to be found. The family of the deceased refused to take responsibility for the subsequent debt, leaving it to the South Korean government to take care of. Subsequent investigations by the Seoul Metropolitan Police and other government agencies revealed that many more homeowners were engaging in similar schemes across Korea. The current administration’s urgent desire to address these issues has been driven largely by the massive 230 million USD that was estimated to have been lost and the worrying increase in suicides due to the real-estate scams and loss of deposit money, especially among young adults in their 20s and 30s.

Understanding Jeonse

The uniquely Korean concept of jeonse arose in parallel with the modernization of Korea, with periods of financial hardship requiring the government to devise the means for citizens to obtain a place to live when they could not afford to make regular monthly payments. Jeonse can be best described as a lump sum house loan, often with the assistance of banks, where residents pay their landlords a substantial amount of money upfront in the form of a deposit that is later expected to be returned at the end of the rental period. This deposit may also be paid in conjunction with monthly payments, although higher deposits generally mean lower monthly payments or none at all. This lump sum typically ranges from 60 to 80 percent of the house’s market value; according to Statista, the amount stipulated in a jeonse contract for an apartment in Seoul in 2023 is, on average, slightly more than 300 million South Korean won (KRW).

Despite the clear benefits of essentially renting a house with little to no monthly rent, there are a number of flaws in this system. In an interview with The Granite Tower (GT), Professor Jewan Kim (Korea University School of Law) points out that the jeonse system can only be maintained when the market price of real estate rises because when the prices fall, building owners will find it difficult to return the deposit. He goes on to explain that housing prices in Korea have recently fallen, leading to an increase in the number of cases of jeonse fraud.

Furthermore, in cases where a homeowner passes away and the deposit has already been spent, there are not many protections in place that guarantee residents can get their full deposit back. Because jeonse is often paid to the homeowner using a loan from a bank, delays in its return in full can cause irreparable damage to the tenant. The recent Villa King case and others like it have been highlighted as even more serious because they have impacted young adults in their 20s and 30s who are already struggling to find high-paying positions in a competitive and highly-educated job market. The rising distrust in the housing market is also considered a potential cost-of-living issue because, according to Reuters, a stagnant market could lead to an economic collapse.

Putting Out Fires

In response to the real-estate crisis, the South Korean government issued a special law for victims of jeonse fraud that prioritizes them if they want to buy the house they are currently living in. The properties affected by the crisis will be put up for auction, and victims of the fraud will be given a special chance to purchase them at the same price as the winning bid with the support of a lowinterest loan. The law stipulates that the Korea Land & Housing Corporation will have secondary priority in purchasing the property, and they may lease it out to the victims. If the agency fails to purchase the home, the victims will be guaranteed public rental housing near their original residence. Additionally, the government has declared that disaster relief funds could be used to support the victims due to the scale of the fraud.

While these steps have been applauded by many for being proactive and generous, other legislative actions are being considered on both sides of the political aisle. The ruling People Power Party (PPP) has introduced the auction preference system, while the largest opposition party, the Democratic Party (DP), has argued that cash reimbursements generated from auction profits would be a better alternative, citing the possible re-traumatization of victims by forcing them to remember their suffering as the primary reason.

The effectiveness of these suggested measures remains to be seen, but experts have begun advising future leasers on appropriate precautions to take. Professor Kim argues that jeonse is, in essence, a flawed system that fundamentally relies on rising housing prices, thus it needs to be used only in very exceptional circumstances where repayment is guaranteed, such as the jeonse deposit being managed by the local government. He further advises tenants to check whether their homeowner is capable of returning the deposit and, in uncertain cases, to pay a higher monthly rent as a tradeoff for a lower initial deposit. Nevertheless, many young aspiring homeowners are still weary of the current housing market, and the ripple effects of the fiasco have not yet fully played out, leaving the next generation of renters unsure of what the future holds.