How to Prevent Another “Villa King” Crisis

The terms “villa king” and “construction king” have become popular. They refer sarcastically to villa owners and developers held responsible when tenants are unable to get back their jeonse deposits. As awareness of jeonse fraud has also risen, debate is intensifying over how to prevent it.

Tenants who cannot recover their jeonse deposits when their contracts expire can suffer serious harm. Moving out before the deposit is returned can bring major disadvantages, but continuing to live there is also a burden. This is especially true when there are no safeguards in place to ensure the return of the jeonse deposit. It is at least fortunate if the tenant is covered by an individual guarantee product from the Housing & Urban Guarantee Corporation (HUG), but if not, losses may be unavoidable.

Situations in which jeonse deposits are hard to recover usually arise during downturns in the real estate market. In preparation for this, contracts divided between jeonse and partial monthly rent may involve relatively less damage. If falling property prices are expected, lowering the share of the deposit is also a way to avoid risk. In areas where population decline is expected to become especially pronounced, it is advisable to arrange safeguards for deposit repayment.

When jeonse fraud is planned from the outset, the scale of damage can be enormous. Some argue that legal mechanisms are needed to prevent this. One such proposal is to allow tenants to inspect a landlord’s overdue national tax liabilities without the landlord’s consent. But such safeguards are not a cure-all. Moreover, they can lead to excessive disclosure of the landlord’s personal information. This is especially true for ordinary landlords who are not registered rental business operators.

To solve this problem properly, we must seek more fundamental solutions that improve the stability and predictability of transactions. What is needed is a structural approach that takes advanced-country systems into account. It is desirable to resolve the uncertainty surrounding rental contracts through the system itself. The best solution lies in enhancing market functions and the role of business.

Today’s real estate market is trapped in a backward environment shaped by developing-country-style regulation, making it difficult to trust transactions and contracts and increasing uncertainty. Excessive regulation has shrunk the private rental market and forced transactions into premodern forms. That is because Korea has institutions unsuited to an advanced country.

Because real estate ownership and investment have been treated as something immoral, misguided regulations have proliferated. Regulations on owners of multiple homes, regulations on rental businesses, and heavy taxation have deepened the backwardness of the rental market. As transactions and contracts have come to be constrained in a socialist manner, market functions have weakened and business functions have become difficult to operate. In the end, contracting parties are easily exposed to risk. As a result, developing-country-type incidents also occur frequently. In other words, the structure makes fraud easy to commit. If, as in advanced countries, market functions were allowed to operate and businesses were allowed to be active, the market could become more sophisticated, relevant knowledge could accumulate, and the stability of transactions and contracts could improve. In addition, as capital accumulates, costs fall and quality rises.

The uncertainty of rental contracts is a failure of institutions and a failure of regulation. Regulations on private rental businesses must be eased. Only by modernizing institutions and deregulating so that the market can function properly can solutions emerge for advancing the rental market.

For a long time, the government has suppressed private rentals while expanding public rental housing projects. But it is wrong to encourage government rentals while treating private rentals as something immoral. On the contrary, government rental is the flawed socialist approach, while private rental is the normal approach suited to a democratic society.

Private rentals should be possible in diverse forms. If an individual or corporation rents out three or more homes, regulations should be eased so that they can register as a rental business operator and engage in rental business in a variety of ways. Allowing large-scale rental operators to operate transparently and with legally prescribed safeguards is the path to modernizing market order and institutions and protecting tenants.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 빌라왕 사태를 예방하려면

Author: Sung-no Choi

Date: 2023-01-02

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25247