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I'll write a longer piece on this, but just a little bit on the raging real estate law reform debate in S Korea.
First, why it's important. Real estate is important in every country, but in SK it is extra important bc so much wealth is tied to it relative to other asset types.
First, why it's important. Real estate is important in every country, but in SK it is extra important bc so much wealth is tied to it relative to other asset types.
S Korea's equity market is good but not great. Stock market is highly volatile and not reliable, such that US-style long term investment in blue chip stocks over 20 years is not considered a good strategy. Capital control is tight, so it's difficult to invest abroad.
This means if you have any wealth to invest with, it is going to real estate. If you are wealthy enough to have a retirement plan, 9 times out of 10 your retirement plan is buying real estate and becoming a landlord. This means real estate in S Korea is de facto Social Security.
Second, what the debate is about. A lot of it revolves around the "jeonse" system that's unique to Korea.
This is how jeonse works. Renter puts down a giant deposit with the landlord, typically for two years. The deposit is usually around 70% of the cost of the home.
This is how jeonse works. Renter puts down a giant deposit with the landlord, typically for two years. The deposit is usually around 70% of the cost of the home.
At the end of the lease in two years, the renter and the landlord can re-negotiate and continue the lease. If the lease ends, all of that deposit is returned to the renter.
It sounds kinda crazy, but the system came to exist because it makes economic sense in S Korea.
It sounds kinda crazy, but the system came to exist because it makes economic sense in S Korea.
From the landlord's perspective, it's a form of leverage. As long as you have find a renter, it means you can buy a house with only 30% of the price. Better yet, it's completely outside of regulated finance industry. You don't deal with a bank. There is no credit check.
Even better: the gap between the price and jeonse deposit often narrows below 30%, sometimes going all the way to 10%.
This makes flipping houses super easy, as long as the price rises. Buy a house worth $500k for $50k, put a renter in jeonse for 2 yrs, sell it for $550k.
This makes flipping houses super easy, as long as the price rises. Buy a house worth $500k for $50k, put a renter in jeonse for 2 yrs, sell it for $550k.
If you are rich enough, you can run 100s of these houses simultaneously. You can even use the deposit that your renters gave you, like this: Buy a house worth $500k with $50k of your own money and $450k in jeonse deposit. Use $250k out of the $450k deposit to buy a $2.5m house.
You can start to see how unbelievably dangerous this can get. It's like having subprime mortgage on blockchain. If the landlord fucks up and wipes out on his investment, it also means wiping out the jeonse deposit of every one of his tenants (=life savings from everyone.)
Even if the system works as intended, it has the effect of overheating the real estate market. Especially in times like this when you can borrow money with very low interest, the jeonse system works like a leverage amplifier.
You borrow money, buy a house, collect deposit, use the deposit to buy even more houses. Works great AS LONG AS THE PRICE RISES. If the price drops? Not just you but everyone who rented from you is destroyed. This incentivizes the real estate price to rise faster and faster.
If you are a young renter looking for a home, this totally screws you over. The houses are now so expensive that your wage will never be enough to buy it. Because jeonse deposit is used as leverage, renting with jeonse is also next to impossible.
Then you're relegated to picking through places that charge monthly rent (called "wolse"), which is slim pickings because most of the decent places are rented through jeonse. (This changed considerably lately, but not enough flip the overall trend.)
Now, here comes the government, trying to do something about the skyrocketing home prices. They see (correctly) that this jeonse leverage amplifier pushes up the home price. So the reform is in major part about making jeonse more regulated and difficult, to unwind the leverage.
Landlords hate this reform for obvious reasons. But the upper-middle class *renters* who can afford the jeonse deposit also hate the reform. They are living at a nice house with a money that will come back in two years, whereas paying monthly rent feels like throwing money away.
There's a lot more to this, but this thread is long enough so I'll stop here. Again, this issue affects literally everyone in S Korea and involves trillions of dollars of money. You shouldn't be hearing this for the first time from a rando Twitter person like me, but here we are.
