Everybody, now even including some Koreans themselves, likes to make fun of how Korea likes to come up with such annoying 5-year-old mentality national catchphrases such as “Do you know 비빔밥 (pibimbap)” or “Do you know 한복(hanbok)”?
This probably doesn’t affect a lot of the short-stay expats in Korea who would only get the smaller choice of places they can rent in a more traditional (monthly, with or without a deposit) way. I would like somebody to tell me what the hell the deal is with this 전세(Chunsei) system. For those who really don’t know it at all, simply put, it’s a system in the Korean real estate market where one is able to rent a place by giving a lumpsum to the owner, usually a considerable proportion of the actual value of the property price and – here is the thing- getting it ALL BACK – from the owner at the end of the contract. What does the owner get? The freedom to do whatever he/she wants to do with that lumpsum, provided he returns it all at the end of the contract.
I just don’t get it. It seems to be an incredibly bad deal for everybody, and not very safe. Simply put, the owner is entitled to work the entrusted sum to outperform the bank interest, while wishing for the property price to rise, and the renter gets to live in the place(“rent-free” funnily enough), with the assurance that he/she will get all the money back – a common method that young people (mortgage is still a foreign concept in Korea) would save up to own their own place.
Talking to my mother, who owns a place she’s let out by Chunsei, and is living in a rented place by Chunsei, it still boggles my mind, and I just cannot comprehend the mentality of a financial society that can have such a strange system being able to exist/function for such a long time.
Anyway, the problem at the moment in Korea, can be summarized as the rise in the Chunsei price (after the contract ends as the owner can raise the price) while the actual sale price remains stagnant, in some cases the Chunsei almost matching the sale price. It is a phenomenon that arises at a period of low bank interest, coupled with no expectation of rise in the sales price.
To counter this, the government has come up with a few not-so-hopeful plans including encouraging low-interest mortgage.
Somehow, my feeling is that this system is a very Korean way of doing things. De-centralized free market economy at a primitive yet convoluted ajuma level. It’s hard to explain to the outsiders (and even to themselves) how it can work, but it’s worked so far. Whether it can continue to work, without drastic intervention from the government, is yet to be seen.
P.S. Additionally, this blog entry about the “foreign” nature of mortgage in Korea, and comments following it, shows the difference in 인식 by Koreans and Western people, in buying a house through mortgage. It goes a little into what “owning a house (specifically, without a mortgage on it)” means to a Korean, and why it might be that despite active promotion since its introduction in the last 18 years or so, mortgage has not definitively replaced the more traditional way of saving up enough through 전세 method (I am still looking for figures to back this up, but just the fact that today we have such a 전세난 and the Korean government is trying to actively promote mortgage to replace it should be enough to corroborate)
In the West, in the heydays before the global financial crisis, for example, if 40 percent of the property value were provided (usually from parents) the rest was easily borrowed from any one of the fiercely competitive mortgage companies/banks. I can see that this would be kind of similar to the way Koreans (usually with help from their parents) first get their step on the property ladder through chunsei. However, I still think it is a very strange system, and is too-deregulated (opposite of what it was originally intended to do) – as fluctuating interest rates have no direct effect (but plenty of indirect ones) on such a system – but maybe this can also act in a good way, as it is buffered from the impact of global effects and closely tied to the consumer trends.
This article (in Korean) is very clear in its explanation of what the problem is at the moment. I particularly appreciate the examples and the charts which show the 전세 percentage of the sales price by different “ku” (boroughs) in Seoul. Especially of interest is the historical origins of the system, which they can trace it back to Koryo dynasty, through the late-Chosun all the way to its modern form in the 1970′s.
The crazy preference of apartment(and new ones) over house is also unique in Korea, and it comes as no surprise that this is closely tied to the continued prevalence of 전세 system.