RENTAL MARKET RE- STRUCTURING IN SOUTH KOREA THE DECLINE OF CHONSEI AND ITS IMPLICATIONS Richard Ronald University of Amsterdam & University of Birmingham & Mee Yoon Jin Land and Housing Institute, South Korea

The Korean miracle: from 3 rd world to 1 st in one generation Chonsei: deposits of 40%-70% of value & no monthly rent – Informal banking for landlords; forced saving for tenants – High quality entry tenure for future home buyers – Virtuous ‘chonsei mechanism’: % of rental sector, 29.7% of housing Wolse: monthly rent for very low income people Chon-wolse: hybdrid tenure THE KOREAN RENTAL SYSTEM

THE SHIFTING TENURE BALANCE While home ownership growth has flattened… Chonsei declined 63.3% % of renting ( ) Chon-wolse increased from 23.3% in 2000 to 37.9% in 2010

Booms & bust represent problems for tenants or landlords respectively Shock 1: house prices doubled leading to more C demand & upward price pressure Shock 2: AFC destabilized C, undermined economic position of landlords and capacity to return deposits Shock 3: return of market over- heating, forced government to re- asses public housing Shock 4: chonsei price boom compared to price volatility and decline in home ownership CHONSEI ‘SHOCKS’ DIMINISHING EFFICIENCY OF CHONSEI MECHANISM

Market shifts Increasing expectations of housing oversupply undermining housing as speculative investment for landlords – 500,000 units built a year since 1989 (80,000 public pa. since 2002) Volatility making chonsei more attractive to better-off would-be buyers Reducing access to both C and home ownership for lower-income HH chonsei prices increased from 40 to 60% on purchase prices Low interest rates & better returns elsewhere – Chonsei-to-monthly rent conversion rate (CMR-CR) in 2011 was 9.3% (double bank deposit rates of return) Landlords attracted to chon-wolse (less risky more profit) – Chonsei ratio of new contracts fell 56.3% to 49.1% ( ) WHAT’S CHANGING?

Korea has more than 2.5 million landlords (many of whom are also tenants) from 16 million households Many accumulated properties when they were younger - when prices were lower - as speculation/investment strategy The chonsei-boom generations are now ageing and their needs shifting DEMOGRAPHIC SHIFTS

Is a Korean Generation Rent Emerging? years old29 years old and under Figure: South Korean Tenure by age cohort

CONSEQUENCES Renting becoming concentrated (poorer, young, single) undermining saving for & ascending the housing ladder – first-time-buyers an average 37.5 years old in 2006 & 41.1 years old in 2012 Low-middle income people pushed out of chonsei – Ratios of low-income chonsei dropped from 18.8% %, middle-income hh 27.2% to 26.7% – high-income hh increased from 24.2% to 27.7% – Chonsei deposits an average 1.7 times tenant income in 2006 but 2.9 times in 2012 More & more households stuck in Hybrid sector – Squeezed by cost of renting & saving – Ratio of families with rent-to-income ratios exceeding 30% increased 28.8 to 34.7% – Chonsei Montly Rent Conversion Rate – (CMR-CR) means families pay more for housing

CHONSEI CRISIS! Addicted to Chonsei: – Decline of chonsei considered a threat to the housing sytem? – Aggregate of chonsei deposits is around 19.6 % of total GDP, or 80% of total housing loans – Creates stability and low LTV ratios – Represents large potentially destabilising speculative fund (money pours in an out) – Undermines impact of policy & interest rate adjustments The Cloud

Chonsei loan schemes (drives up prices and individual debt) Public Chonsei housing schemes since 2011 (about 15,000 units pa.) Tax relief for landlords who buy to rent for 5 years (poorly targeted!) Bogumjari scheme 1.5 million social units (mixed tenure) (see Ronald and Lee, 2012; Lee and Ronald; 2012) Housing allowance scheme about to be launched GOVERNMENT RESPONSES

Will Chonsei disappear? Housing sectors are certainly polarising: homeowners & chonsei tenants on one side & monthly renters on the other Different structres but similar outcomes to European contexts: i.e. generation landlord and generation rent KEY POINTS!