Jeonse Fraud: The Tragedy of Anti-Market Policy

Jeonse fraud is now an issue causing suffering for thousands of people. There have even been tragic cases in which some took their own lives. The jeonse fraud problem began surfacing late last year. The problems now being identified and exposed stem from jeonse contracts signed already 2 years ago. Jeonse contracts signed after that point 2 years ago are bound to continue coming to light not only in the second half of this year but also into next year. In short, there is a high likelihood that this nightmarish tragedy will continue. That is why this grave problem is not ending here; it is only beginning.

Why, then, is jeonse fraud occurring on such a large scale when it had not before?

The direct culprit behind jeonse fraud is the “three rental laws.” On July 30, 2020, the National Assembly passed revisions to the Housing Lease Protection Act and the Real Estate Transaction Reporting Act, whose main provisions introduced the right to request contract renewal, caps on jeonse and monthly rent increases, and the jeonse/monthly rent reporting system. The following day, July 31, the Cabinet immediately deliberated and approved the amendments and promulgation, and they took effect at once.

Among these, the biggest problem was the right to request contract renewal. It effectively mandated that the existing 2-year lease term could be extended by an additional 2 years at the tenant’s request. This brought a storm to the housing lease market. Existing tenants were able to remain for 2 more years at deposit levels close to their previous ones.

But when tenants entered into new contracts, landlords began raising deposits across the board on the assumption that they were now being forced into a 4-year contract. A policy intended to stabilize housing instead drove up the cost of new leases without limit. The people who suffer most when deposits rise are ordinary working people. Because they could hardly bear the burden of monthly rent no matter what, they scrambled to secure jeonse leases instead, and jeonse deposits soared through the roof.

Higher deposits on new leases due to the 2-year extension of contract renewal rights

Then did real estate prices also all rise in tandem?

Many people define the Moon Jae-in administration as a period of surging real estate prices. That is, of course, undeniably true. But not all real estate rose equally. For most people, the ultimate form of housing is an apartment. Whether they currently live in a studio, a villa, a gosiwon, or some other type of housing, most people ultimately want to own an apartment. For that reason, apartments are the best kind of housing not only in terms of living conditions but also as an investment. Under the Moon Jae-in administration as well, apartments rose the most.

Did villas rise just as much as apartments?

They did not. Villas are a housing type tailored to urban living. Located in convenient city areas, they use layouts that minimize common areas while maximizing private space, thereby supplying housing for newlyweds and low-income households. For newlyweds and young office workers, villas are often homes suited to dual-income households because of easy commuting, and at the same time a stopover on the way to owning an apartment. They are based more on end-user demand than on investment appeal. As a result, rather than large villas, most units are small, generally no larger than National Housing size. In the end, while deposits skyrocketed, villa prices did not rise by nearly as much, creating a decoupling phenomenon.

Did the victims know that the market price of villas was not rising?

Even during the broad real estate upswing, it was already possible for jeonse deposits to approach or exceed the market price of a villa. Some say the problem lay in blind faith in systems such as deposit guarantee insurance, or in fake guarantee insurance policies. In other words, they argue that victims suffered because of fake or faulty guarantee insurance regardless of market price. But if tenants had clearly known that the deposit had already overtaken the market price, no tenant would have easily entered into a jeonse contract that threatened the safety of their hard-earned deposit simply by trusting guarantee insurance. Yet many victims of jeonse fraud were under the illusion created by the overall rise in real estate prices and failed to recognize the true market value.

Why is it so difficult to verify the market price of a villa?

The most important thing in preventing jeonse fraud is to predict the sale price a property would fetch if it were auctioned off or sold. Only then can one estimate the maximum deposit that could be recovered. But predicting market price concerns the future, so it is not easy. Villas in particular are highly diverse, making their market prices especially difficult to estimate.

A representative way of checking real estate market prices is to search KB Real Estate market prices. If you type “KB Real Estate market prices” into the internet, you can access a real estate price search site. There, by entering the relevant area and property conditions on the search screen, you can check various recent actual transaction prices. One thing to note is that in many cases KB Real Estate market prices do not appear for villas. For apartments or officetels, where units are standardized by building and unit number, many comparable sales exist, so recent transaction prices are easily found. Villas, however, do not allow such easy reference to actual transaction prices, which is why they were mobilized in jeonse fraud.

Couldn’t people have avoided jeonse fraud by relying on trustworthy real estate agents?

There are reports that some licensed real estate agents colluded in jeonse fraud. However, many victims used online real estate brokerage platforms. There can be no nationwide expert on local property prices. The person who knows the market price of a given property best is the licensed real estate agent who has operated in that area for a long time. Especially because of issues of trust, such agents cannot easily afford to cause problems.

For tenants familiar with the area, online real estate brokerage platforms can be effective because of their low commissions. But for outsiders moving to an unfamiliar place near a new job or school, a long-established local licensed real estate agent was the safer path for completing a real estate transaction.

Then why were so many households victimized by such a small number of fraudsters?

The most representative area affected by jeonse fraud is Michuhol-gu in Incheon. Just 3 jeonse fraudsters owned as many as 2,969 units. One cannot help but blame the comprehensive real estate holding tax, which was sharply increased under the Moon Jae-in administration. Villas serve the function of supplying privately rented housing, whether through jeonse or monthly rent. They are the kind of properties owned by people who, while living in their own apartment in old age, possess one or several villas to earn jeonse or monthly rental income. But when the comprehensive real estate holding tax was suddenly raised, a tax bomb hit owners of multiple homes. Owners who held villas either sold them off or changed their use to neighborhood commercial facilities.

The people who took up that sale volume were jeonse fraudsters. For those trying to escape their situation with one big score, the comprehensive real estate holding tax was of little concern, and because the properties already came with jeonse deposits attached, they did not even need a large amount of money to buy them. In this way, the Moon administration’s real estate policies created the conditions that brought tears of blood to ordinary people.

At the Cabinet meeting on May 9, President Yoon Suk Yeol said that the anti-market and abnormal policies of the previous administration, which caused a sharp rise in housing prices and market disruption, had become the breeding ground for jeonse fraud. This was a cool-headed and realistic diagnosis of the problem, and we must clearly face how anti-market policies produce unpredictable side effects. A jeonse fraud catastrophe like the current one must never be allowed to recur. Analyzing the immediate problems is important, but future countermeasures are even more important. It will not be easy, but one hopes the government will gather the wisdom of experts from all fields and work toward a solution.

Wonyeongseop Won, Editorial Board Member of Future Korea · Attorney-at-Law

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Original title: 전세 사기, 반시장 정책의 비극

Author: Young-seop Won

Date: 2023-05-19

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=10&idx=25678