RENTAL MARKET RE-STRUCTURING IN SOUTH KOREA

THE DECLINE OF CHONSEI AND ITS IMPLICATIONS

Richard Ronald University of Amsterdam & University of Birmingham & Mee Yoon JinLand and Housing Institute, South Korea

• 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 KOREAN RENTAL SYSTEM

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

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 over-heating, forced government to re-asses public housing

• Shock 4: chonsei price boom compared to price volatility and decline in home ownership

CHONSEI ‘SHOCKS’ DIMINISHING EFFICIENCY OF CHONSEI MECHANISM

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)

WHAT’S CHANGING?

• 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

DEMOGRAPHIC SHIFTS

2000 2005 20100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

14.3 12.7 11.6

48

33.427.6

22.5

38.3 48

11.1 11 8.9

2000 2005 20100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

38.7 39.3 36.8

42.134.9

34.3

12.218.7 22.6

Free rent or other

Monthly rent

Monthly rent with deposit

Chonsei

Owner-oc-cupied

Is a Korean Generation Rent Emerging?

30-39 years old

29 years old and under 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

• 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

GOVERNMENT RESPONSES

• 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

KEY POINTS!