Wednesday, June 21, 2023

"Why South Korea’s Housing Market Is So Vulnerable"

The University of Chicago has minted 20 Nobel Laureates, 14 of them in Economics.
(yeah, yeah, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, not a real Nobel, blah, blah) 

From the University of Chicago's Booth School of Business' ChicagoBoothReview, June 6:

The death of a South Korean property tycoon who owned more than 1,000 apartments in the country hit the headlines this past December. Dubbed the “apartment king” by the local press, the man reportedly owed many millions of Korean won (₩1 million is equivalent to US$770) to tenants, who found themselves out of pocket with little recourse. Since then, media outlets have reported on similar “villa king” cases, with Bloomberg writing that the country is trying to contain “growing fallout from housing rental schemes that scammed millions of dollars from more than a thousand tenants.” In at least one case, local police are investigating whether organized crime was involved, according to the Korea Herald.

But alleged scams aside, South Korea’s rental market is facing a crisis because rising interest rates can lead landlords to default, according to Tsinghua University undergraduate Baiyun Jing, Chicago Booth PhD student Seongjin Park, and Booth’s Anthony Lee Zhang. Their research explains why the market is so vulnerable to interest-rate fluctuations—but also proposes a policy solution.

In much of the world, renters pay an initial security deposit followed by a monthly fee. In South Korea, tenants can do the same or opt for a system known as Chonsei, or “key money,” which has been in place since the 1960s. In Chonsei, tenants pay a larger up-front sum (often borrowed from a bank) and then live rent free for the duration of the lease, which is usually two years. When the lease is up, they get their entire security deposit back. Essentially, instead of paying monthly rent, tenants give landlords an interest-free loan.

Chonsei deposits can be substantial—as much as 50–75 percent of the market value of the property itself—but have some advantages over either renting or buying. For younger tenants, the deposits are often paid by parents, so Chonsei allows them to focus on building a career or savings. For landlords, they constitute a strong credit channel—loans that can be used to pay off the mortgage on existing properties and finance the purchase of new properties. Chonsei makes it possible for landlords to speculate and amass substantial real-estate portfolios without any preexisting capital....