Monday, August 12, 2013

Housing rental markets in Korea

When you move to a new place, one of the first things to look up is the housing or rental markets.  Where to live and how much to spend are two key constraints to the new residence.  This applies to Korean housing rental markets as well.

In Korea, there are two major rental markets.  One is monthly rental(Wolse, 월세) that you can easily find everywhere around the world.  The other is yearly rental(Chonse, 전세) which is very unique system, as far as I know, only exists in Korea.

First, the monthly rental is quite similar to that of the states'.  You put certain amount of security deposit, and pay the monthly rent.  One thing you would feel strange is the security deposit is a lot higher than you deposit in the states.  Here in the US, the security deposit is usually around one-month-amount rent.  Yet in Korea, the security deposit is around one-year-amount rent.  For example, when you find a place for monthly rent of $800, the amount you pay for security deposit is $10,000.  Sometimes, you can negotiate the amount of security deposit by increasing the amount you pay for the monthly rent.   Such as paying $900 for decreasing the security deposit to $8,000 or so.  It is somewhat strange system of monthly rental market compared to that of the states'.  Yet by explaining the yearly rental, you would understand why the system works this way.

The yearly rental is the system you would find only in Korea.  You put security deposit of very high amount in the first place, and get it back when your lease ends.  Weird?  Yet that's how it works.  For example, one condo is priced at $500,000, and the yearly rental is $350,000.  You deposit $350,000, and get the exact $350,000 back when you leave; of course, if there is a damage to the property, some amount may be taken off.  So, if you have a good amount of money, and do not want to spend on monthly rent, this should be your choice.   Even if you do not have the exact amount and need to get some loan from the bank, the interest rate you pay is a petite amount compared to the monthly rent you usually pay.  This sounds too good to be true?  Extraordinarily, this works how it is.

<Picture 1 : Nightscape of Seoul>

So, why there is such a thing as a yearly rental?  Apparently, the landlord seems an angel.  Yet the landlord also benefits in two ways.  One is the simple financial interest he/she gets out of banks.   However, that amount is awfully small especially when the interest rate is super low.   The major benefit the landlord expects is the appreciation of the property.  If the landlord only has $150,000 in his/her pocket, and wants to purchase a real estate of $500,000 value, the landlord fills up the shortage of $350,000 from the yearly rental.  Hoping that in a year or two, the property would increase its value more than what he/she paid.  And this actually worked in past several decades.   In other words, you can purchase a house without a mortgage loan from the bank.

These days, however, the yearly rental market is shrinking its size.  The real estate market is not as good as past several decades, and the yearly-rental-market homeowners would not expect much profit out of it.  On top of that, financial interest rate is the lowest ever, which makes the landlords to get less and less profit out of.  Thanks to all the harsh situations, more and more landlords are changing their properties to monthly rental instead.   Well, maybe in 10 years, the yearly rental market would disappear in history.

* Source of Picture

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