One out of 10 jeonse contracts in Korea failed to repay deposit in June

[Photo by Kim Ho-young]

South Korea has seen the amount of jeonse deposit accidents reach an all-time high in June as landlords fail to return security deposits to the tenants on time amid the slow property market and rise in interest rates.

According to the Housing & Urban Guarantee Corp. on Monday, the amount of jeonse deposit accidents stood at 444.3 billion won ($350 million) in June, up 36.7 percent from 325.1 billion won in May. It is the highest amount ever for a single month.

The amount of deposit return failures hovered between 200 billion and 300 billion won every month - 223.2 billion won in January, 254.2 billion won in February, 319.9 billion won in March, 285.7 billion won in April, and 325.2 billion won in May, before exceeding 400 billion won in June.

Jeonse is a unique housing rental system in Korea where a large lump-sum payment is deposited for the duration of a two-year renewable contract. Despite a modest recovery in the real estate market, many landlords still struggle to repay the deposits to the tenancies upon contract termination.

The amount of deposit return failures reached an all-time high of 1.85 trillion won in the first six months of this year, up from 1.17 trillion won in the same period last year.

The amount includes cases where the tenant was not able to receive back deposits after the end of the contract or within one month from then on or did not receive the deposit after allocation due to auction or public sale during the contract period.

The number of such accidents totaled 8,156 in the first half of the year, with 7,382 cases concentrated in Seoul and surrounding areas.

Deposit return failures occurred in one out of every 10 jeonse contracts. The rate, which stood at 5.8 percent in January this year nationwide, soared to 9.5 percent last month. In the Seoul metropolitan area, the rate rose by 4.4 percentage points to 11.2 percent.

The amount of rental deposits that Housing & Urban Guarantee reimbursed to tenants on behalf of landlords through guaranteed insurance also exceeded 1 trillion won this year.

“Based on the scale of deposit return failures that have occurred in the first half of this year, the scale could reach 3 trillion won for the full year,” said an official from the Housing & Urban Guarantee.

Focus, in the meantime, is on whether the government’s measures that ease lending regulations for landlords scheduled to take effect at the end of this month will be effective.

Under the measures, the government will temporarily ease regulations on loans to landlords and rental businesses for the purpose of returning tenants’ security deposits for one year from the end of this month.

The goal is to reduce the rental business interest repayment ratio to 1.0 times from 1.25-1.5 times for housing rental business operators, and to apply the debt service coverage ratio (DTI) of 60 percent instead of 40 percent for landlords.

The government also plans to disclose a list of landlords whose registrations have been deregistered for not returning rental deposits, and to allow tenants to terminate rental contracts if the landlord does not have security deposit insurance.