Kang Kyeong-hoon

The author is a professor of Business Administration at Dongguk University

Korea's jeonse - a unique housing lease system - is based on a cross-collateral structure rarely seen elsewhere. Landlords provide their homes as collateral in exchange for large deposits, and tenants provide the deposits as financing. In economic theory, jeonse functions as an efficient financial contract. When individuals who do not know each other attempt to exchange large sums of money, banks are normally required to mediate and absorb credit risks. Jeonse bypasses that need.



Bengt Holmström, an MIT economist and recipient of the 2016 Nobel Prize, argued that pawnshop-style financing is efficient, as high collateral relative to the loan value lowers information costs. Jeonse works by the same logic. In periods when financial markets were underdeveloped, it enabled homebuyers to borrow without bank monitoring, while tenants paid no interest or monthly rent. Scholars Kim Se-jik and Shin Hyun-song have noted that jeonse contributed to Korea's rapid growth by increasing both saving and investment.

But the system depends on key assumptions. Housing prices must remain significantly higher than jeonse deposit values for tenants to feel secure. In past decades, strong economic growth and population increases meant home values rose consistently, satisfying that condition. Rising home prices also encouraged landlords to prefer jeonse over monthly rent, allowing them to buy more properties with deposit financing.

Those conditions no longer hold. Structural shifts - low growth and population decline - are eroding the foundations of jeonse. In places where home prices are stagnating or falling, the system's risks are becoming more visible. Inexpensive villas and multiunit homes have seen growing numbers of "cart jeonse" cases, where home values fall below the deposit amount, leaving tenants unable to recover their money.

Statistics show that jeonse is already in retreat. According to the Ministry of Land, Infrastructure and Transport, monthly rent accounted for 43 percent of rental transactions in 2021, 57.4 percent last year and 62.6 percent as of September this year. Yet, in parts of Seoul and surrounding areas where expectations of rising prices persist, jeonse-based gap investments remain common. Investors buy homes by adding deposits to minimal personal capital. High leverage leads to higher returns, encouraging more investment, fueling home price increases and making credit more accessible. As a result, jeonse is deepening polarization in the housing market.

At the same time, jeonse has evolved into a form of informal finance linked to household debt through gap investments. Korea's household debt is already among the world's highest as a share of GDP. If jeonse deposits are counted, the ratio becomes the highest globally. What began as a system that helped tenants access housing is now a channel for financial instability.

In short, jeonse has shifted from being a functional housing and financial tool to a source of systemic risk. It once helped tenants avoid monthly rent and served as a stepping stone to homeownership. Today it generates anxiety over deposit returns, increases guarantee insurance payouts and adds to household debt. Policy must now focus on controlling these risks and guiding the system toward an orderly transition.

First, speculative demand using jeonse loans must be curbed. Loans intended for housing stability have been diverted into gap investments, undermining the system's legitimacy. The government should tighten lending standards and gradually restrict support for households with substantial assets. It should also consider including jeonse deposits in debt service ratio (DSR) calculations. Although legally considered rental deposits, they function like loans. Given the accumulation of household financial risks, integrating jeonse into the broader debt management framework is unavoidable. A gradual approach would...