🚨 Metropolitan Jeonse Loan Regulation Plan

Today Korean Economic News | 2025.01.24

📌 Kim Byung-hwan "Decision on Metropolitan Jeonse Loan Regulations Will Be Based on Market Conditions"

💬 Chairman Kim Byung-hwan announced plans to strengthen regulations by lowering the jeonse loan guarantee ratio from 100% to 90%, and stated that additional regulations for the metropolitan area will be determined based on this year's real estate market conditions.

1️⃣ Simple Explanation

The government has announced plans to strengthen jeonse loan regulations. Let me explain what this means and how it will affect us.

A jeonse loan is money borrowed from a bank to secure the jeonse deposit needed to rent a home. Until now, the Korea Housing & Urban Guarantee Corporation (HUG) has provided guarantees for the full amount (100%) of the jeonse deposit. For example, when signing a 300 million won jeonse contract, banks would lend the tenant 300 million won backed by HUG's guarantee. With this guarantee, banks face reduced lending risk, making it easier to approve loans.

However, the government now plans to lower this guarantee ratio to 90%. For the same 300 million won jeonse, HUG will only guarantee up to 270 million won, meaning the remaining 30 million won must be secured by the tenant directly or through other borrowing methods. This change makes it more difficult to obtain jeonse loans, which can help prevent overheating in the jeonse market.

It's particularly noteworthy that decisions about additional regulations for the metropolitan area (Seoul, Gyeonggi, Incheon) will be made after observing this year's real estate market conditions. This indicates that the government intends to adjust the intensity of regulations based on real estate market temperature.

These changes may burden those seeking jeonse contracts, especially younger generations and non-homeowners with insufficient savings. However, from the government's perspective, these measures aim to prevent increased household debt and instability in the real estate market caused by excessive lending.

2️⃣ Economic Terms

📕 Jeonse Loan

Jeonse loans are loans that tenants receive to secure jeonse deposits when signing housing lease contracts.

• Generally, they can be applied for with a jeonse contract and income verification documents, and loans are available for a certain percentage of the jeonse deposit.
• The loan period usually matches the jeonse contract period, and the interest rate is typically lower than that of general mortgage loans.

📕 Jeonse Loan Guarantee Ratio

The jeonse loan guarantee ratio refers to the proportion of the jeonse deposit that the guarantee institution is responsible for.

• A 100% guarantee means that the guarantee is provided for the entire jeonse deposit, which has the effect of relaxing financial institutions' loan review criteria.
• As the guarantee ratio decreases, the tenant's self-funding burden increases, and financial institutions conduct stricter loan reviews.

📕 Korea Housing & Urban Guarantee Corporation (HUG)

The Korea Housing & Urban Guarantee Corporation (HUG) is a government-affiliated organization that is a major provider of jeonse loan guarantees.

• In addition to jeonse loan guarantees, it offers various housing-related guarantee products such as housing presale guarantees and rental housing guarantees.
• HUG's guarantee policies are adjusted according to the government's real estate policy direction and are used as a market stabilization tool.

📕 Regulated Areas

Regulated areas refer to special management zones designated by the government to stabilize the real estate market.

• They are classified as speculative areas, speculative overheated zones, and adjustment target areas, with differentiated loan regulations and tax burdens by region.
• The metropolitan area generally faces high upward pressure on real estate prices and is often designated as a regulated area, frequently becoming the main target of additional regulations.

3️⃣ Principles and Economic Outlook

💡 Economic Impact of Adjusting the Jeonse Loan Guarantee Ratio

• Lowering the jeonse loan guarantee ratio from 100% to 90% brings various economic ripple effects.

  • First, there are positive effects in terms of household debt management. Reducing the guarantee ratio limits the scale of jeonse loans, helping to curb excessive growth in household debt. According to the Bank of Korea, jeonse loans account for about 15% of total household loans, so managing the growth in this area can contribute to overall household debt stabilization.

  • Second, it affects the supply-demand balance in the jeonse market. As jeonse loans become more difficult to obtain, jeonse demand may partially decrease or shift to the monthly rent market. This has dual aspects: it can contribute to jeonse price stabilization in the short term but may increase pressure on the monthly rent market.

  • Third, housing cost burdens for vulnerable groups may increase. Higher self-funding ratios can worsen housing accessibility for young people, newlyweds, low-income households, and others with insufficient savings. This area requires supplementary measures.

  • Fourth, it induces changes in financial institutions' lending behavior. The reduced guarantee ratio increases financial institutions' risk burden, potentially leading to stricter loan reviews and upward pressure on interest rates.

• Considering these various impacts, adjusting the guarantee ratio can be seen as a policy attempt to find balance between the macroeconomic goals of real estate market stabilization and household debt management, and the microeconomic goal of ensuring housing stability.

💡 Metropolitan Real Estate Market Trends and Possibility of Additional Regulations

• As Chairman Kim Byung-hwan stated, decisions on additional regulations for the metropolitan area will be determined based on this year's real estate market conditions. The current metropolitan real estate market shows several notable characteristics and challenging factors.

  • First, market trends are differentiating by region. While Seoul's Gangnam area and some popular regions still maintain high price levels, outer areas show relative stability.

  • Second, the impact of interest rate cut expectations on the real estate market is noteworthy. Recent signals of interest rate cuts from the Bank of Korea could positively influence real estate market sentiment, potentially acting as a market stimulation factor.

  • Third, there are supply-side variables. The impact of large-scale housing supply plans in the metropolitan area, such as the third-phase new towns, and supply-demand changes according to completion schedules must be considered.

  • Fourth, demographic changes and household diversification are changing housing demand patterns. Increases in one-to-two-person households, aging, and other factors are influencing housing type and regional preferences.

• Considering these complex factors, the government is likely to prefer customized responses through market monitoring rather than blanket regulations. In particular, there is a high possibility of selective strengthening of regulations for areas showing signs of overheating, and deregulation for depressed areas.

💡 Structural Changes in the Jeonse Market and Response Strategies

• Strengthening jeonse loan regulations can promote structural changes in the jeonse market beyond short-term market stabilization measures. It's time to understand and adapt to these changes.

  • First, the transition from jeonse to monthly rent is expected to accelerate. The benefits of the traditional jeonse model have already decreased with the end of the low-interest rate era, and strengthening loan regulations will further reinforce this trend.

  • Second, it can also influence housing purchase decisions. As jeonse loans become more difficult, some consumers may turn to purchasing, but loan regulations and high housing prices can act as limiting factors for such transitions.

  • Third, the importance of government housing finance support policies will increase. To mitigate the side effects of strengthened jeonse loan regulations, expanded customized financial support for vulnerable groups such as young people and newlyweds is necessary.

  • Fourth, enhancing transparency and stability in the private rental market becomes even more important. Along with the settlement of the three rental housing laws, it's time to discover win-win models between landlords and tenants and provide institutional support.

• Amid these structural changes, the response strategies of economic actors must also change. Tenants need to adapt to changes through increased self-funding, considering deposit-to-monthly rent conversion, and establishing long-term housing plans. Landlords need to reconsider rental yields and diversify rental methods. Financial institutions are expected to respond to market changes by developing various housing financial products.

4️⃣ In Conclusion

Chairman Kim Byung-hwan's statement shows the government's will to gradually strengthen jeonse loan regulations for real estate market stabilization and household debt management, while responding flexibly according to market conditions. The measure to lower the jeonse loan guarantee ratio from 100% to 90% is a starting point for overall regulatory strengthening, with the possibility of additional regulations following metropolitan market trends.

In the short term, such policy changes can burden jeonse consumers, especially those with insufficient self-funding. Based on a 300 million won jeonse, approximately 30 million won in additional funds will be required, potentially raising housing entry barriers for young people and newlyweds. Also, this is expected to accelerate structural changes in the rental market by shifting some demand to the monthly rent market.

In the medium term, positive effects on overall real estate market stabilization and household debt management are expected. As excessive loan-dependent jeonse demand decreases, market soundness may improve and the risk of sharp price fluctuations could be mitigated. Additionally, when combined with supply-side policies, it can contribute to long-term housing market stabilization.

Policy authorities should also consider complementary measures to minimize the side effects of strengthened regulations. Comprehensive housing policies are needed, including expanded customized financial support for housing-vulnerable groups, increased public rental housing supply, and improved rental market transparency. In particular, rent stabilization measures should be considered together to prevent jeonse loan regulations from leading to increased monthly rent burdens.

From the tenant's perspective, it's important to respond proactively to these policy changes. It's necessary to review housing cost plans, explore ways to secure self-funding, and consider alternative rental methods such as deposit-to-monthly rent conversion if needed. Actively utilizing government housing finance support programs can also be helpful.

In conclusion, despite short-term inconveniences, strengthening jeonse loan regulations can be seen as a necessary measure for the goals of long-term housing market stabilization and improved household financial soundness. However, it's important to closely monitor the policy's effects and side effects, and to adjust flexibly according to market conditions. Additionally, a housing welfare perspective should be maintained to ensure that all citizens can enjoy decent housing environments at reasonable costs.