Korea’s villa jeonse market faces collapse on tighter deposit insurance

Korea Housing and Urban Guarantee Co.‘s Seoul western branch [Photo by Han Joo-hyung]

South Korea’s villa housing market in is facing a crisis due to stricter standards for jeonse deposit insurance policies that go into effect next month.

A villa is composed of small-sized residential buildings which usually have three to five stories and are cheaper than apartment complexes. Villa jeonse tenants often pay a large lump-sum deposit to their landlord, and the deposit is returned at the end of the lease that can be guaranteed by insurance.

But the criteria for joining the jeonse deposit insurance policy will be strengthened in May, making it difficult for six out of 10 villas in Seoul and surrounding areas to qualify, according to a survey conducted by real estate agency Ziptoss at the request of Maeil Business Newspaper on Wednesday.

A deposit insurance policy is a form of insurance for tenants who do not get their security deposit back on time. If the landlord does not return the deposit after the lease expires, the insurer pays the deposit to the tenant and then bills the landlord for the amount. This insurance has become increasingly important in Korea after a recent series of jeonse deposit scams.

However, the standards for deposit insurance policies will be strengthened, causing concern for landlords and tenants alike.

To meet the new insurance policy requirements, landlords must reduce the deposit amounts they hold for multiple properties. But many are finding it challenging to meet these requirements because of their loan restrictions in place. This has caused many to worry about the future of the villa jeonse market, with some predicting that many villa owners may go bankrupt.

Earlier, the government has attempted to address these concerns by lowering the standards for joining the insurance policy. However, the new criteria still make it impossible for a majority of villas to qualify. Out of 96,385 villas in the Seoul metropolitan area with leases that expire between May and April of next year, 62 percent, or 59,476, are unable to join the insurance policy due to the same deposit amount.

Earlier, the government lowered the threshold for Korea Housing & Urban Guarantee Corp.’s guarantee insurance to 90 percent from 100 percent of the jeonse price from May to prevent deposit frauds.

Under the new standard, out of 96,385 villas in the Seoul metropolitan area whose contracts expire from May to April next year, 59,476 villas, or 62 percent, could not be insured with the same deposit.

To make matters worse, the officially announced housing prices for villas in the metropolitan area recently dropped by about 6 percent from a year ago.