South Korea's Ponzi-Like Rental System Is Imploding
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- Опубликовано: 6 июн 2024
- South Korea has a unique rental system whereby tenants give a large deposit to the land lord, typically 60 to 80% of the homes value. After the lease term expires, typically after 2 years, the land lord gives the deposit back to the tenant. During the tenancy the tenant does not pay any rent to the land lord. The deposit acts as an interest-free loan. As we show in this video, this unique rental deposit system has created a situation of inordinate amounts of leverage and recently caused major problems in the country's real estate market.
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0:00 - 1:20 Intro
1:21 - 5:54 Rental Deposits
5:55 Debt Crisis 
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the _renter_ takes the risk of what their landlord does?! Absolutely horrible.
Thel basic idea is that the landlord got an interest free loan while the renter got a lower rent rate from the bank instead of directly from the landlord in the period of the rent agreement (since he's paying interest based on only ~70% of the property price).
I can see how it works in the historical setting, in that if the landlord is unable to payback the deposit, the farmer/renter would then be get partial ownership of the current land he's farming or with just a bit extra from the current harvest, he can buy the whole lot. On the other hand, if the harvest fail, the deposit paid back by the landlord would be able to support the family while they renegotiate a deal on lesser land to farm or seek greener pasture somewhere else. If there was a bad harvest coupled with landlord failure to pay full deposit, the land is still there for renegotiation/sale to others.
Basically the flaw in that system happen when it got translated into the modern banking environment where instead of just landlord and renter relationship, you have banks that provide mortgage to the landlord and rental loan to the renter. The banks are the real winner in this because regardless of who fail, they win (or at least, lose less).
In Switzerland, if interests increase, the law says the renter has to pay for this increase, paying for a "risk" between the landlord and the bank.
@@retroanim What? They enter floating rate mortgages or loans? That's kind of crazy.
Ridiculous
The landlord takes risk as well because it says the loans are collateralized. But yes basically the renter gets cheaper rent by taking on some of the risk as well. Which is how it works You can trade risk for " returns ", In this case returns being applied to lowering your rent.
price goes up = squeeze the tenants. Price goes down = run for the hills, leave the tenants holding the baby. Tenants seem to get screwed over the world over. I wonder why that is.
There’s a positive side to it too - I got two year lease on an apartment at about 40% below the previous rates in the middle of covid. I was able to move away to another city when my company went 100% remote and able to move down the street from the school my kid ended up going to after one year in the new city.
They're not capital owners.
Probably because renting is like flushing your money down the toilet.
Why
Greed and the desire to take advantage of the situation have always been there, and the fact that jeonse does not work now as it has over the past 60 years is due to the instability of the financial system. During the era of high inflation in South Korea from the 60s to the 2000s, it was more profitable for the landlord to use Jeonse due to the falling purchasing power of the won. And in the early 2000s, when real estate prices began to rise rapidly, Jeonse also turned out to be more profitable for the landlord. For 60 years, landlords have preferred Jeonse and it is unlikely that they will abandon this system in the future when the time comes to break the current financial system. The poor will become even poorer, and the rich will become even richer, regardless of changes and laws that the rich themselves establish for their own benefit.
Wow, Koreans have a lot of trust in their landlords. I can't imagine give an individual or a corporation 80% of a house's value for 2 years.
Seriously-- I would be anxious the entire two years until I got the money back. Wouldn't be able to enjoy a single moment in the home
When a tenant is borrowing a loan from the bank, the tenant also buy insurance at a small one off fee in case the landlord go bust I.e. default then the bank will auction it off, which offsets the risk (slightly). It is bizarre despite the technology advancement in Korea but they've the most backward leasing system dated back to Josun era
Yeah I have heard that sometimes the deposit disappears .
Oh I knew the Jonse system would explode!
I am in SK since 2012 and had such a bad feeling about it!
Luckily I'm just renting
I'm a landlord, and I think it's a crazy system.
If someone told me I had to do this, I would consider it a scam 😂
If someone told you you could own land and do absolutely nothing with it and somehow make a profit, you'd think it's a scam too
@@duncanhw it IS a scam
@@duncanhwyou still have to initially save up money to buy the land just like any other goods and services. You are acting like the lands are free.
@@howo357 Only land increases in value without any associated labour. You can make money by doing absolutely nothing. Unlike everything else. Other goods and services aren't fixed in supply.
@@howo357 To make money with something else you have to actually do something. Add value to society. You don't have to do that with land.
What a fucked up world where people have to get a loan to just rent a house
Because the interest is lower than rent
What a time to be alive eh?
What is crazy is it you have 70k for the house. You can live rent free for two years.
Just go from home to home paying the loan.
Or I should say condo? You're living in SK. I don't think it has many suburban cities unless you move to a "rural" area.
Like I said. When it works.
Anyway yeah something tells me one day in hundred years or so we are going to see revolts. Landlords seem to have all the power again.
In Japan many landlords still expect a month’s rent as gift money.
@@donaldmacdonald4901paying rent & giving another a month $$$ as a gift?
Adding a bit more light from an insider perspective (I live in Korea and rent alone). One of the other reasons the deposit system is popular is because no one can afford monthly rent. My monthly bills take up 65~70% of my monthly income, whereas if you get a deposit loan you're living rent free and you've essentially paid nothing. Loan repayments are typically significantly smaller than current rent prices and people often see it as 'forced disciplinary savings' since you know your deposit is all yours in cash in 2 years time.
with a declining population, do you foresee this scheme to be gone?
It will never will gone@@meklavier4664
You’re not really living rent free, you basically pre-paid it.
If you actually get it back :)
What you are paying is just the interest and not EMI right? So After 2 years, Once you get the money back do you not have to return the money to bank? Also if you dont return the money to bank will the home that you previously rented be seized because it was the collateral for giving this loan
Thanks to WSM, I now know there's an even worse system for renting than we have here...
That's why so many love the west. Easier system to work with. During covid so many tenants got away with not paying rent. Heck it t happens without covid.
We have so far...
Lmao go down the street and look in the alley sure you will see someone that you have it better than lmao.
Marginally speaking
@@KayDejaVu then tell me why there's close to a million of homeless in the US alone?
it's a system that was set up to spread the credit risk of a property across 2 people, one landlord and one renter, for the bank. the risk of repayment is effectively the same, but instead, renters have much more "skin in the game" than renters in other economies, but still the equity upside is for the landlord only. basically it has 2 beneficial effects for the bank and business owners, spread risk across a wider base, and makes people far less likely to strike/engage in industrial action. renting with the threat of having the substaintial deposit taken away disadvantages the renter much more severely than a first and last months deposit.
Ahh yes the CCP system is so much better. Pre-sell a home, force people to get a loan for home, never finish building home, force people to repay loan for next 30 years on a home that's ever built, do not force real estate company to finish home and don't charge them with any crimes, do not force bank to forgive loan as house is never completed, only charge the person who took the loan with crimes if they don't pay back loan.
@@dontcare7086 cool story bro, I think the lesson to take away is that governments and banks of every stripe sees their people as cattle or beasts of burden to be saddled with debt, either at the point of a gun or a pen, to render them powerless but just not hopeless enough to revolt.
Just to sum up what you explained: Krazy Koreans.
@@dontcare7086dude lol where does your hate come from? i hope you are at least paid to be a troll and not doing this for free because if it is so then gosh you need psych help man. lol
@@dontcare7086 He didn't mention "China".
I imagine most renters still use the system because they are basically forced by landlords who are dependent on it. If you have no choice, you will accept it even if you know it's a terrible system. Just like in every other country basically.
It's the banks driving this
@uselessDM your music is sick. listened to a few tracks. keep it up!
@uselessDM It's the banking system that's driving this... don't always blame the landlords.
No dude, the renters themselves want Jeonse. You can get insurance on your Jeonse through a new government program, so it's a little safer than what is presented here. Plus from the renters perspective, paying the repayments on the loan is cheaper than paying monthly rent.
Nope. As long as interst rate is lower than 6%, it is cheaper to borrow money from bank than simply paying rental fee.
We lived in Korea five times, military and post-military career. The Jeonse system works well with a tightly-woven social fabric, which has changed with all the economic and demographic changes there. If it’s one landlord, living on the premises of a quad-plex, and everyone knows each other and sees each other every day, it works. The more you scale, the more risk you incur. They scaled the hell out of it, it became an impersonal industry with these so-called villa kings (saw their buildings everywhere) and now it’s broken.
Learning about real estate practices around the world is always mind-blowing to me
YES, paying 80% of housing cost as deposit is bonkers! not sure why voters forced the govt. to change the rule!!
You should try learning about why governments make it illegal for us to live cheaply and why Kowloon Walled City was torn down and every government made it illegal to rebuild.
@sun2020able Koreans actually like this system, it's that with dropping housing prices the risk is becoming higher.
I am both a landlord and tenant and I use joensae for both.
A unique practice in Singapore is that public housing (housing 85% of the population) has regulations stipulating that the % of people of different races living in each neighbourhood shouldn't stray too far from the national average, so that people have enough opportunity to interact with people from other races. So when you want to buy/sell a public housing apartment from/to someone of a different race, you need to check if you can still be in compliance with this regulation. A side effect though is that houses that by regulation can only be sold to people of minority races are of lesser value, disadvantaging the seller, who might've bought it first hand from the gov't, when prices are likely more controlled & less subject to market forces (that can be influenced by regulations like this one too) & thus not as cheap as when he/she sells it now.
Also quite unique to this country is that 1st hand public housing is cheaper than 2nd hand ones although they're newer, because they have more gov't subsidies (& also more restrictions to ration such housing to people who need it more e.g. poorer people, people who're going to form families as opposed to singles). You also have to wait for the house to be built (the gov't also rents out older existing public housing for you in the interim while you wait for your house to be built, but I heard the supply is limited). Quite a no. of my friends are now marrying before their homes are completed! Another reason is that 2nd hand housing also offers more choice, such as more luxurious units e.g. maisonettes that're built before the people complained about housing becoming too expensive, & prompted the gov't to go back to basics. 2nd hand houses are also older, & more likely to have been built before bomb shelters were legally required, which also eats up some of your house's space, & unlike newer houses also lets you change your windows.
However among 2nd hand houses, they depreciate with age as you don't get to own it forever, but only until it's 99 yrs old, after which the gov't can reposess it for free (though more expensive houses depreciate slower, especially the more luxurious ones that're becoming rarer as the gov't now wants to go back to basics & stop building these types of houses). Banks are less willing to lend you money to buy houses if the house is older, or may demand that you repay it more quickly, as they worry that since older houses are more depreciated it'll be harder for the borrower to pay back the loan
So every home basically has 2 loans on it. 1 loan taken by the landlord and another taken by the tenant.
That's just legalized fraud and bound to collapse.
and police in korea team up with scammers very well and government also putting their spoon on it. this is how fraud turns slavery. this is the true korean culture. only kpoop fangirls think its fantastic
And tenants are really the ones paying each other their deposits back, with their respective loans. The landlord is only paying the bank. Tenants are loaning interest free money to landlords, paying interest to the bank, and covering the deposit of a renter who is moving out. 🤔
I lived in a Korea for a few years and chose not to use this Jeonse program. I had always wondered whether the rental deposits were insured, as you’d worry about whether the landlord would run off with your deposit if home prices fell, and didn’t want to risk that. This video seems to explain it well - feel sorry for the tenants who got left holding the bag.
So can't they just continue living in the house? Do they really have to move out and keep making the monthly housing payments? Just refuse to move out
There are a lot of overseas Koreans who were running away from paying off debts...
@hufficag I would presume the tenants cannot pay the loan off since it is a two year loan without their deposit getting back and then the bank takes the house to get their collateral, but someone more knowledgeable can correct me if Im wrong?
Asset-liability mismatch is the first-line risk here; 2-year rolling loans on flats that require 30+ year loans. Duration mismatch, interest rate risk. Then the more fundamental risks of drops in real estate price, drops in demand for rental unit risk, etc.
Then to add to the excitement, let's overlay a ponzi scheme...
That's the only value banks and investors ever create - they suffer instead of us, if the loans don't work out.
For Banks, I would think they would go into an interest rate swap on the loan to protect themselves.
@@thewhitefalcon8539 How often does a bank fail? a 13% drop in asset price is just the cost of doing business for them. The value of the home will rise again and they will be whole. The risk, especially with high population density and low supply, is low.
they have no need to hedge the duration risk here, the loans are collateralized by title and the yield is likely high enough to cover the risk anyways, the only thing needed is a mortgage insurance policy that likely is forcibly assumed by the buyer and possibly a specialized insurance policy on the tenant default which might be a standard contract in Korea. the original poster has a 100s level course level of financial background. banks straight up win in this scenario, they make the collateralized long duration loan on the mortgage and get another collateralized loan on the rent, the cost of carry is likely miniscule. in the event that a real estate "collapse" actually happens, the systemic elements of the risk on these loans can't be hedged regardless.@@rcbrascan
I cant believe the property owner can use a mortgaged property, then use the same house as collateral on the tenant's payment. Double dipping where they take little risk...
Just want everyone to know that there is insurance available for the Korean jeonse deposit system. If the landlord can't return the deposit, the insurance company will do it for you. So it is not so crazy as it seems. However, getting insurance requires lots of paperwork not everyone who has jeonse does it because of how complicated it is.
This insurance isn't as safe as you think lol, and the landlord ALSO has to apply for it and if they forge the documents well good luck. Happens all the time, and this is why people suicide
@@iio77 The landlord does not apply for the insurance. It is the tenant.
It is still crazy since they make it so complicated most people don't do it. You just explained why it's so bad- but are still coping that it's not so crazy.
It really is crazy- especially since it's just an extension of a historical system that should have ended decades ago.
I was going to make the same point. I live in Korea and paid a large deposit. The first time I had to do this, I just about jumped out of my skin. The insurance does help alleviate the worry about repayment.
Jeonse system has been on decline for some time now. They predict it'll disappear completely in coming years.
Thank god
Only by more irresponsible over-leveraged people gambling with and losing other people's money instead of purely risking the bank's money as it should be.
@@VanessWildTrader Not only that, the system only works if Korean banks can manage to keep high interest rate. That's fine when Korea had double digit or high single digit growth, but it can no longer support it. Anyway there's no such system anywhere in the world. So it'll go extinct soon enough.
That's what they say but whenever I look at apartment rentals, far more jeonse offers than monthly rent. Villas are different, monthly rent is more common with those but people don't want to live in villas. Those are for 'poor' people
@@UnicornsPoopRainbows ah no, m talking about condos in central locations Seoul. Increasingly monthly rental is more common. When bank interest rate cannot yield as much or higher revenue than monthly, it becomes less attractive.
Paying 70000 for lump rent when house costs 100000 is just insanely stupid.
Wsm just explained it why banks agree to lend it, didn't you get it? People wouldn't be able to get the same 70k as a mortgage from the bank, but they can get 70k from the bank as the rent.
As explained tho. The trade off is
1) You pay 5000 rental every year
2) You pay 3500 *ON AVERAGE* every year (but with risk of going -70k and get ruined for life)
@@Daniel-xaogjeyh If you can't get an extra 30k from the bank then tyranny is built into the system by wealthy land/property owners colluding with financial institutions to ensure this snowball system of money trickling up isn't broken.
@@Rnckothere’s no free lunch…
@@Rncko How would the renter lose 70K when it's a deposit that the landlord have to give back at the end of the lease? If the landlords go belly up with debt, do renters get no protection so they can't get their 70k deposit back?
If the landlord can't repay the deposit at the end of the contract - for whatever reason - why is the property not forfeit tonthe tenant? Functionally the house should be collateral on the loan given by the tenant to the landlord and they should have priority. If the landlord double dips and also uses it as collateral for other debts, that should be fraud.
Imperfect, the tenant might not want to stay there, and depending on value, someone else might also have a lien on the remaining balance of the property (ie the 30% in the original example), but at least the former tenant wouldn't be out of pocket.
Financial systems almost always put the government and lenders above individuals. If a bank could lose their investment due to personal liabilities from the borrower, they wouldn't lend out to risky borrowers.
Our modern economy is fueled by spending, no matter the risk long term.
@@MegaSimmaster To a degree, yes. But this system essentially allows someone to use the same collateral twice, and even if you have a hierarchy of creditors, the point of that should be to determine who loses in the event that the collateral is significantly under value, not decide whose loan was never collateralized in the first place. That's nuts.
@@jonathanj8303 It was already explained. The landlord got initial funding from the bank to buy the property in the first place so banks has first priority for security over land title. The rental scheme allows the tenant to stay rent free over 2 yrs when the scheme works. Banks compounding the problem by lending tenants the 70% rental deposit but that what they are in business to do. Banks have a licence to print money by credit creation in the form of loans.
All works well with rising property prices and stable interest rates, but as we have seen the world over and time and time again, it all unravels when credit becomes tight, interest rates rise, and then property values go down, Then the bubble bursts, small people get hurt most and get wiped out, the banks get first priority over any equity left, or worse case they also go insolvent. Its how the financial system is setup, no surprises here
The problem happens when the house prices go down to the point it gets lower than the initial deposit then there's no way to return the deposit even after selling it. This sistem only works if the prices are stable or keep going up.
@@4ce5bf154 If the landlord is able to use the property as collateral on other loans - as appears to be the case here - then it doesn't need to be anything like that low. If those other loans are under-collateralized enough, the house value may be insufficient to repay the deposit even if it loses no value at all.
I genuinely don't understand why landlords wouldn't be legally barred from investing rental profits into existing real estate. (Yes that's challenging, but there's numerous ways to effectively do this.)
Building new real estate would be fine, but buying existing real estate only artificially bloats demand for the existing supply, strangling the market by flooding it with _literal_ rent-seekers.
It isn't as common as they are making it seem. Before you sign a lease, you can easily check out 1. The legal owner of the property (usually the husband with his mother or wife handling the paperwork) and 2. How much debt he has, including in property.
If they have the same amount of debt as the deposit, no one will rent from them.
They can't lie or falsify documents, it is all tracked by the govt.
@@UnicornsPoopRainbows What I'm complaining about isn't related to debt, and in retrospect it isn't even specific to South Korea. The ability to leverage profits from real estate for the purposes of converting even more of the real estate market into rent-seeking rather than investing in new buildings hurts the market.
But on second thought, it doesn't even matter where the money came from in the first place. Buying _existing_ property specifically for the purposes of renting it hurts the market, period. So... I don't even necessarily know what my specific complaint is anymore, just that renting sucks.
It was very restrictive initially and the K-rental system was not for the rental profits from the beginning. It was, by all means, to borrow money from the renter for 2+ years for their own use. But the prev government was very stupid enough to increase the borrowing cap (almost unlimited) for the renter deposits even if the deposit is more than 100% of the house value. They thought that it was all about supply-and-demand problem, thus all these new measures (from 2018) was for the land-lords to do business more easily and the only measure for the renters was "lending" more money for the deposit. So there were plenty of measures to bar the investors to exploit the housing market previously (before 2018).
@@UnicornsPoopRainbows I do not believe the proceeds from "Jeonsae" is classified as "debt" by the government and THAT is crux of the issue here. Yes, bank loans are tracked and can be checked out but amount of $$ someone has as proceeds from getting "jeonsae" isn't tracked as debt. So, yes, if he/she has mortgage from bank, it can be tracked, but not if he has 1 house which he rented out and gotten $70k "jeonsae", that $70k is NOT documented as debt since technically, it is collateral that he is keeping, not a loan. Before, it wasn't much of issue as MOST people would just OWN the house and rented it out and used proceeds to deposit into banks to receive interest income but during the years of low interest and real estate bubble, they determined that buying more real estate using the deposit is better investment (and it was for a while it lasted). So, using $70k deposit, they can buy 2 more properties, get $140k and buy 4 more properties, etc. and some ends up with 1000+ properties.
@@greenredbluewhat you're complaining about is a very important part of the problem. It's incentive based. Building new carries additional risk than buying existing. In addition, it helps increase value of existing properties, this inflating their wealth to get additional loans. The government and "investors" hate systemic deflation
Very insightful video, what a crazy system, but well explained with its origins way back in the agricultural times. Thanks!
I live in Hong Kong where rent and property prices are batshit crazy. Korea’s on a whole different level
Hello London
@@redx11x Except you don't LIVE in London, son! You live in some bloody city outside of London, so you have no clue what it's like to live inside London. The commenter said he LIVES inside the city of Hong Kong where the rent is batship crazy. Get it, son?
@@samsun01 I have no clue what is like to live in London? Emmmm, the fact that i was born(in central London) , raised and live here (NW London). I know better than you... Son.
Actually, Hong Kong is way worse in terms of income/price ratio compare to even Seoul, and London is dirt cheap compare to Seoul.
Asian markets are on a completely different dimension.
@@samsun01 so what makes you think i don't live in London? Are you just a hate filled person angry because you live out of the City.
I live in the suburbs not central London. Only the very wealthy or those in an old council estate live on the border of the square mile.
We never ever considered Canary Wharf central or even shitholes like Hackney.
Everything has become gentrified. House prices are at ridiculous levels.
I would never want to live inside the City central district. A home without a garden and parks nearby destroys the senses.
"Homes cost just 7x median income in the United States"... that also sucks.
@@AdirondackHomesteadIn my opinion, a 2500 square foot house is just barely big enough for me. The less space I have, the fewer hobbies I can pursue and the smaller they have to be. But that's just the way I like to live. Ideally, I'd have way more space than that and a huge garage.
grow up...the rest of the world has it a lot worse! cheers from UK
@@AdirondackHomestead Where did you get this number of 2,500 sq ft being the average?
Toronto is pretty bad. I'd guess the median household income is $100k and average price for a single is probably $1.2M.
That's the same rate for cheaper public housing in Singapore too, while private housing cost ~2.5 to 4x more
There are soo many red flags with this system, it's similar to how the 2008 real estate crash occurred.
Nah, the 2008 one happened because the loans were being packed, repacked, and sold between various firms. These loans were subprime, meaning they were loaned by banks who weren't sure the borrowers could repay.
In South Korea, they probably do more extensive background checks like job security, salary, bank account savings, and existing liabilities.
This is really just for draining young people of any possibility of owning homes unless they were born rich.
@@xc5103 They are also surprised that young people in South Korea do not get married and do not have children when real estate prices are rising and the chances of finding a job are decreasing every year. The same thing happens in all countries that are part of the Western financial system. Every time the United States prints trillions, it hurts the world's poorest countries, which are forced to absorb the inflation created by the Fed. The whole world is paying for the current well-being of Americans. South Korea has paid a high price for its prosperity, which will cost it a 50% reduction in the country's population in the next 30-50 years.
@@maxwolf8055 They really do be like that meme with the cyclist who sticks a rod in their own wheels and then blame it on something random
@@maxwolf8055Americans are hurting dramatically more than third worlders due to our inflation. Third worlders did it to themselves. Technically our financial pain is due to ourselves also but it’s hurting us primarily. The fact houses doubled in price in 3 years or cars doubling in price in 3 years or food doubling in price in 3 years while wages are the same for example hurts us far more than a Sudanese 😩
@@maxwolf8055soon the rest of the world will make the connection when that happens 😅 a certain country will be in for a bad time.
Would like some diagrams to understand it better.
So, a renter gets a loan and gives it to landlord who already took the loan (mortgage) to buy the house? In essence, this could be prevented by prohibiting landlords from requiring a deposit larger than landlord's down-payment.
So typically there is no loan on the property by the landlord, having paid the rest of the value in cash.
I can tell you first hand, there are also issues with criminals who are taking loans on multiple properties at the same time with different banks to finance home purchases.
My landlord had multiple properties in my complex enter bankruptcy proceedings. I was lucky enough to be able to salvage my situation in bankruptcy. Many others are not as fortunate and would be left without hundreds of thousands of dollars.
To expand on this, it is true that back taxes and mortgages CAN take priority over the renter, there are actually required ways of registering documents that if followed would protect you. The big issue is when the unit only sells for 60% at bankruptcy, you're still left trying to cover a large portion of that 80% loan you got from the bank.
I know this all from the painful experience.
I'd also add that the government has put in some required protections. You used to have to get both parties to sign on for loan protection insurance, but after these incidents kept piling up, the renter can now do it unilaterally. That is one reason why the jeonse system has remained popular.
This is very common in South America too!
Oh wow I didn't know! In which country you'd say it's prevalent?
Are you talking about Chile?
não conheço nenhum páis daqui da america do sul que adota esse sistema
Bolivia has a very similar system, it's called "anticretico".
But Bolivia is an poor undeveloped country full of ignorant peasants...
Absolutly wild, thanks so much for this content. Thats really some weird system.
We have this in India as well. Called as "heavy deposit"
Not allover india
70% of the value of the house? Don't show off.
“Almost” like a Ponzi scheme…what you described IS a ponzi scheme 😂
The fact that the bank loans are structured such that the ultimate risk is borne by the tenant is fundamentally broken.
Renter's have the least amount of power in this scenario and have nothing to gain from entering into this type of arrangement, whereas the banks are earning a consistent profit without bearing any risk, since they will literally turn their victims (sorry, customers) into wage slaves to pay off the debts incurred by the landlord's risk-taking!
The government is also to blame by not strongly regulating the terms of these loans. If the bank bore the risk in case of default, then it would be far more stringent in ensuring the landlord's had sufficient liquidity and adequate capital/net equity to repay the loan.
Guess who is friends with the law makers~
In South Korea, it's the victim whose always liable.
Nah, this isn't broken. A broken system is one which isn't doing what it was intended to. Capital owners always intend to extract all wealth from workers and foist off any risk on their victims, and they designed this system.
This isn't broken. This is the intent. The word you are looking for is parasitic. Unworthy of existence.
Banks and governments are never liable for their own actions. If they fuck up it's individuals who end up paying every single time across every single country and economic system.
Crazy that mortgage is more senior to the rental deposit, that is some corrupt bullshit that the landlords setup
The renters should require the landlord to buy insurance / a bond to protect their deposit
The government provides a guarantee for about $75k but the lowest deposit is usually around 200k so it's just a tiny band aid
The issue in Korea is the concentration of opportunity. You want high income? You want an office or tech job? You want to be around like minded people? Well you got squeeze in with everyone else in to Seoul,, also the same in Tokyo or London, or Paris or Sydney the list is very long of countries with this concentration problem. London and Tokyo are great examples of how extreme it can become.
Oh, and let's not forget how much of a self renforcing cycle this becomes. Even if you have dozen other regions that could easily be built up, espeically if you tag them into the "mains" they never will. Because "that costs too much" while the city dewellers skip lunch to save rent money, a problem that could be remedied by more transportation to outside towns into neighboring regions where the price of both is lower and the extra income would turn the receeding business tides there.
Instead they become Rust belts or farming hovels that we must evacate all the most talented from. Then get mad when they can no longer afford filling their shopping carts (whatabout our sales figures) or the threat of farms be abandoned for want of laborors (Who wants to grow all our corn and soybeans?).
You want to know why this country stinks? All the good workers are running away from 90% of it chasing "good jobs" from terrible bosses(who will dissmiss them for having high expectations like a .5% pay rise this year). And they have no reason to comeback to any of it without great, fast, realiable public transport that reingnites development and business here. Too bad it won't come for another century or more.
Congratulations on your great work
So lemme get this straight, RENTING is already a WEALTH TRANSFER from those in the working class to those in the owner class. In Korea they also allow for this to be a DEBT RISK TRANSFER on top of that?? WHAAAAAAAT?
Whenever capital gets involved with basic human needs, we WILL see the worst in humanity. Pathetic.
Interesting to see the historical and eventual cultural influence that makes their rental market. Need strong political will and foresight to change it, but challenging and slow. South Korea also is dealing with a problem of over concentration in Seoul leading to lives of desperation and other social ills, really bad feedback loop where their success only entrenches it further. Hope their society can change for the better... and tbh everywhere else. All our modern societies seem to be sucking the life out of us.
Not going to change. Big landlords carry sway with the poloticians.
They should just get a 30-year mortgage with a 20% down payment
The landlord investing part is incorrect. Landlords do not have the freedom to invest the deposits as they wish. The landlord can only invest in time deposits and government bonds, not corporate bonds. Because the money has to be available at the time the contract ends, landlords can not tie up the money in illiquid assets. Now, some unscrupulous landlords do misappropriate renters' funds but then are sued, and the renter has to go through a drawn-out legal battle lasting 2 years on average to get their money back. However, these cases are not common. In most cases, the renters' money is safely returned.
Not to mention insurance to protect against fraud and negligence by landlords.
Right off the bat he say 70% of housing value for 전세, which is wrong. He didn't do enough research and just trying to get the view
Does Samsung Bonds count as corpo or gov bonds?
@@victorygo looks like are the one who did not do enough research. What are you implying about 70% figure?
You take the government bonds and use them as collateral for a loan to buy corporate debt. Problem solved.
The declining population is a huge ominous cloud hanging over this whole system. The fact that more elementary schools are closing by the year in South Korea is the equivalent of the canary in the coal mine. There will come a day in the extremely near future where there will not be enough new Jeonse renters to replace the existing renters. Property values will fall off a cliff as panicked landlords rush to get out while they can. I see a lot more ruined tenants in the future and unlike over leveraged landlords these tenants will not get bailed out!😳
Underated chanel!!! Love the topics!!!
Imagine the money you could make just renting out properties like a normal person in South Korea.
Ask people from Hong Kong and you would know your life had already been decided from last generation.
@@apophisstr6719I’m not sure what you mean. Is China going to invade South Korea?
@@LB-yg2br No, I meant the property pricing of HK had inflated ten folds since the 80's whilst salary of ordinary people barely went up.
Basically, if a family didn't already own an apartment during the early time, it's nearly impossible for normal salaryman to ever afford their own flat nowadays, well, barely able to rent even.
It's not that simple in Korea. There are traditional monthly renting system in Korea as well, but you don't see them in Apartments, for a good reason. These western people in the comments are out of touch from this foreign system so they don't know but there are a lot of systems in place to benefit and secure tenants for Jeonse, so it has way too much merit. You won't be able to compete.
@@endjfcarSuch as?
To me it seems that in South Korea which is an industrial Oligarchy, it is also a race to the bottom till one man or company or handful of these owns all private real-estate.
Home prices declining sounds pretty awesome.
"situation is bad, houses are becoming affordable."
Wow, very interesting and informative. Thank you for the video.
We have this system in Finland. The main selling point of it is that if you have an area with this system, it effectively filters out all trouble causing tenants, undesirables, criminals, junkies and worst of all, poor people without the need to own a house and carry the responsibility of maintaining it.
Uhm no I don’t think this is equivalent to the system in Finland. In Finland you have functioning debt controls so landlords can’t use deposits as security for new loans.
@@johanstjern4118 yeah, I don't know about that and what limits there are. I'm sure you can't go wild with people's deposits like banks do.
why are poor people worse than criminals and junkies?
@@luqmalka it was a joke.
26x WOW I thought London was bad we are like 20x
Great reporting
good detailed content.
Why in the world would a bank give a renter an unsecured loan of 100K? Does SK not have bankruptcy laws ?
The loan is secured against the house that the tenant is renting because the loan money is actually going to the landlord.
You don't want to owe money in korea
The wild part is that u can borrow up to70% of the property value. Who cooked up this idea?
Upon looking around, a decade ago, you were only able to borrow less than 50% of the property value under the same system. Something definitely happened
Based on the video this loan is last in the creditor line so I would argue that in most cases its actually unsecured debt@@JohnSmith-ho3cu
Doesn't seem like a terrible system if you add safeguards for renters. If deposits are secured by the landlords property, require that the deposit is the most senior debt (this may require landlords to own a property outright if they want to use the deposit system, otherwise they can only take monthly tenants)
Owning a property outright should be standard
@@cgfreed3 in most cases banks "own" it, but the "owner" has usage control.
in many ways it is similar in western countries, only that the bank buts up cash and the "owner" pays interest instead of rent.
@chimagamer4157 that's a very interesting point.
There is little good about this other than maybe SOME cost saving but at what risk? You're essentially taking on half the debt load you would've taken on for ownership of the home anyway but get no upside and all of the risk. It's essentially the landlord taking out a HELOC but under the tenant's name with them ultimately being responsible if anything goes wrong with the market or house itself. Kind of insane that they still alow this.
Excellent video thanks. Explains the system well and the history of its origins which makes sense. There are similar systems in other agrarian cultures in Asia that are still in use today and have been adapted to urban property rights and usage.
Like anything, when it gets over leveraged and impacts property prices and that interacts with human nature ( greed) the bubble finally gets too big and regulation intervenes to deflate or pop the bubble and all the pain starts to happen
How this impacts the banking system is the next question. Will in be contained or will it lead to banking failures?
You should look at the unique "pagdi" system which used to be prevalent in India and neighboring countries. A system designed to avoid Registeration Tax.
Really hard to imagine how anyone thought this scheme was a good idea.
Just remembered, average Korean has to earn 27 times more to buy a house. Also, no bank gives you 30 year mortgage in Korea.
The current government around the world only think about money for themselves
It's actually really easy to imagine because it was explained in the video. You must not have been paying attention
@@DefensiveDriver Sarcasm is clearly lost on you.
@@scarffracker1918 where is the sarcasm lol
Looking at the state of most modern developed economies it kinda looks like Japan of all places might come out ahead.
Thanks for that in-depth explanation!
Such an… interesting system. I get the appeal, but this essentially turns landlords into thousands of tiny, poorly regulated banks, with each landlord default a tiny bank failure. And that cannot end well.
The tenants only owe debt on paper. It’s really the banks that made those deposit loans who are now holding the bag.
4:57 I guess you didn't research well. That system is also used in south America where I live and is the same thing. I did it and one time 1 owner didn't gave me back my money so I sued him and he lost his home which was actioned to pay what he owed. It was an isolated case since the system still works well. Ppl do it because banks have too many requirements to get a loan even if you have a house as collateral. But it's not allowed to do this if the house has a mortgage. The house has to be fully paid.
Brazil is half of South America and this system definitely does not exist there. It doesn't exist in Uruguay either.
Considering that South Korea is in the beginning stages of rapid population decline this system is ought to collapse.
It is a ponzi scheme. The first time a jeonse was received, the landlord spent it. Now, most tenants have to wait for a new tenant to make their deposit before they get their deposit returned. Its a terrible system based on a culture that no longer exists.
No one should even be allowed to buy a second house until everyone else owns a house.
Que comentario tan pendejo.
Or you could just ban publicly traded corporations from buying up entire blocks of homes.
Then you would have a constant housing shortage. You would have cheaper houses though. The fix for this problem which is world wide is actually supper easy for government to implement. No businesses, corporations or investors can buy houses unless they are doing new builds or very substantial works. They can then rent these places if they wish but not for longer than 20 years. This increases supply of both houses and rentals. It should in theory make house prices lower as large corporations will try to build many places together. Draw backs would be the house designs could be very similar again government could step in and control the amount of same design houses.
Who do you think make the law ? it's the very people that have more than one house to begin with.
There will never be a case where everyone owns a house because some people prefer renting. Not everyone wants to commit to the same house for their whole life, after all.
Excellent presentation! I feel bad for renters caught out in the cold. The greedy landlords, not so much.
In India, one has to pay 3 months rent as deposit to the landlord.
The only good thing is it is a must to make a legal contract.
if you can borrow up to 80% of the property value, why not buy it outright?
Actully it's about 30% of the value of the house. Housing price in Korea especially in Seoul cost between 1 to 5mil. Avg xitizen can't qualify for 1mil loan which is why lease is approximately 30 to 40% of the house.
yeah. I noticed that. My mother-in-law rented her new flat with only 30% of the price and that is like 50% of her previous one.
I needed a $10,000 deposit for a 1br apartment in Seoul. This is on the low end. A friend of mine needed $50,000.
Edit we also pay monthly rent
As the developed worlds population begins a rapid decline it’s only inevitable that home prices in many countries will go down in real value. Rust belt cities such as Detroit can show us a lot when it comes to the damage falling populations cause.
The desirability of the jeonse system is entirely dependent on the current Mortgage rates. The renter would want Jeonse in a low interest environment, and monthly rent in a high one.
In a high interest rate environment, monthly rent can eventually equal the interest payment on equivalent properties (you have to include opportunity costs of the loan as well).
However, it's a bad system overall, as it puts the renter in way too much risk. Those that need the Jeonse system are probably in no financial state to be able to bare the burden of such a loan.
This is an interesting system and I don't see it as intrinsically worse than conventional landlords. Landlords with too much leverage happen under conventional mortgages just the same and renters get screwed just the same. This looks like a great way to avoid squatters and keep rents down. If anything is missing it would be tenants rights to stay in their apt. even if their landlord defaults.
The difference is that the tenant is still on the hook for paying back part of the large bank loan if the landlord defaults and the foreclosure doesn't recoup the money to cover all of it.
70% of a $250,000 home is $175,000 and I could easily see a scenario where a foreclosure sale only returns $150,000 for the tenant after first paying the senior debt of the property taxes and main mortgage.
This leaves the tenant with all the problems of a defaulting landlord (finding somewhere new to live, moving costs, etc...) and they still owe the bank $25,000!
@@russellpengilley5924 All they need is some very reasonable tenant laws that allow them to remain in the home for an extended period paying the same amount and with the right of last refusal to purchase. Compared to the stupid "squatters rights" laws elsewhere this is brilliant.
The failure and stupidity are on the part of the reckless landlord and bank giving them too much money for too little collateral.
If anything, the problem would be a shortage of rentals that DON'T require this commitment.
@@russellpengilley5924 Isn't your worst case scenario easily avoided with a law that bars eviction without forgiving the remaining principle?? If this tenant isn't good for a few thousand dollars the bank will get nothing from their bankruptcy, so why not sell to the tenant for less with a profit sharing provision?? The first $25k of any gain on sale goes to the bank.
50% on the low end, and as much 80% the value of property. Jeonse or “key money” only in south korea
Used to have it in the uk as well
Key money isn't the same as jeonse. Key money IS quite high compared to the rest of the world though...
The biggest problem is realtors are bribed to allow real estate ponzi scheme.
44.5% of real estate ponzi participants were realtors.
But among 99 realtors, only 1 had license canceled.
An insane system. as a landlord you can either play it safe which is losing you money, especially with low interest rates. Or speculate on rising real state prices.
The system has no reasonable return on investement for a landlord built in. Lose money or gamble. That is crazy.
They could fix it with a disagio on the deposit at the end of the contract. so the renters don't get it all back. Makes sense too, because currently the renters don't actually pay for the usage of the flat. They just pay interest to a bank.
I guess the banks love the system. they cat the actual roi for the real estate and if the landlord wants some too they get to sell more loans, if the loans fail they get the house. The bank always wins in that system.
As said in this video this system was from good old times, and it was even more horrible back then when farmers usually have to sell their crops at reduced price to the same landlord and never be able to pay back the loan. This perpetual loan slave system was common in Ancient china too where slaves were not allowed therefore landlord use it to make loan slaves. It was abolished (by force of course) by CCP one piece of land at a time as they took over China, Then the republican Chinese force which represented the landlords that resisted this change every step of the way ironically abolished it in Taiwan when they fleed to Taiwan, because by then they have become landless lol
❤wow...the concentration of wealth and power in ever fewer hands😢is was and will remain global
Your story for the KMT is a little too simplified. The KMT didn't represent the landlords, they were simply a big interest group like a few others. There were attempts for land reform, but they were unsuccessful due to landlords being too powerful. But once they only had Taiwan left, where landlords were either japanese or collaborators and thus could be disregarded they implemented land reform. Even when they controlled the mainland they knew how important land reform is for development, they simply didn't have the political power to overcome the landlords.
@@Gulitize ehh, u said im simplified while proceed to simplify it wrong, KMT attempted to land reform under first leadership when the communist were a faction part of KMT. The land reform failed due to thousands of party members (mostly communists) who went out to reform got bought out or simplied killed by the local landlords, so KMT caved in to the landlords and kicked communists out the party. Also at that time all big interest groups are landlords first other interest 2nds thats why people simply just call them landlords.
Someone please explain why rental deposit payments is cheaper than paying the annual rent in an apartment. Why should there be a gap between the 2 payments on the same rental apartment. That seems like it is a rigged system.
Pay 3.5% interest only on a $100K loan = $3,500 for the whole year. Pay $1,000 a month for a whole year = $12K. You save $8,500 a year living in a place with a key money rental system. The landlord gets the bonus of gaining interest from having your key money in the bank during that time period.
Glad the background music is back
Jeonse (imputed interest) is cheaper than monthly rental but riskier.
The first home is the "catalyst" for the landlord. They might have a regular mortgage they pay monthly.
The "first home" is actually their second home... Unless the landlord bought a duplex. They are buying investment properties. The first renter takes out a loan for 70% of the value of that "first home." That's probably enough cash for the landlord to put down payments on 2-3 more houses.
The renters are being used as debt donkeys. The landlord is basically using them to take out upfront loans so they don't have to. The bankers should have been aware of that fact.
That system had a mathematical loophole. Tradition was used against them. Thus, a massive surge in home prices as other landlords were bidding each other out of the market. Much of that seems to have been fueled by irresponsibly low interest rates. Similar things happened in the USA.
Calling it a Ponzi-like scheme is accurate. There are a bunch of people that are really good at math, and really terrible people (immoral, irresponsible, selfish). It's a "tragedy of the commons" type issue. As soon as something good becomes public, someone tries to use it up for themselves. In that case, I'd guess engineers by education were to fault. "Landlord" isn't something you can get a degree in... It's something that draws people from all fields of study. The most volatile job markets will bleed off into "real estate."
The elephant in the room is that it is part of the banking system
Its the banks that facilitate and encourage the behaviour
Banks have a licence to create money via credit creation and issuing loans and they lower the risk by securing that debt against hard assets if possible, preferably residential property
The rest just plays out as expected, leading to bubbles, excessive debt in the system and finally a bust
Now it time for the clean up phase
I mean, that would be true if the renters couldn't see how much debt the owner had before signing the lease. But they can check and if it is more than 30% of the jeonse, people find another property
@@UnicornsPoopRainbows when you say "find another property" that's interesting. What does that do to the market? How does that affect the price of the home rental if you can just "hodl" like it's a Bitcoin?
Errrrr wtf ? This is so weird.
I think companies usually pay some assistance for rent. I lived in few countries and usually bills were covered by the company. There was even tax deduction on that
Very good!
It's unnecessarily risky for the renter who gain little to no added value.
How about the USA? In general, people's salaries are not adequate to pay for rents. Yet, real estate prices are sky high. The economics of price movements according to supply and demand does not seem to work in the US.
Its batshit crazy! The first apartment I ever had on my own in 2004 cost 190 euros/month (1 bed room, 32sqm). Same apartment today cost 450 euros/month. Landlord sold of his property to a bigger company that started raising the rent.
@@MrDadyD That sounds reasonable to me tbh? That is 4.5% inflation per year on average. Not ideal but absolutely not batshit crazy at all.
Maybe as an East Asian I just became numb lol
My understanding is the rental deposit has seniority of future mortgages on a property so if you know the existing mortgage amount, then it is a relatively safe system as long as you have enough coverage
Try it with more realistic numbers and it starts to make a lot of sense. Especially if no bank is involved to finance the "rent" (e.g. money from parents).
Interesting bubble. But I can definitively say that most people where I am from would rather buy the house outright with a mortgage rather than make a reverse mortgage
Only if the landlord "villa king" will sell. The whole system is a cash cow for them and most likely they will not sell.
The model worked for farmers that used the land to generate income - once that was no longer the case it became a ticking timebom
This system is indeed unique and badly thought out. The perception is that the economy will always grow.
So I give a deposit of 100.000+ € and there's no guarantee whatsoever that I'll get it back, and no clear way for the property owner to make money on my deposit, and no monthly rent being paid? On top of that, when sh*t does hit the fan, the property owner carries no risks and just doesn't give me back my money? Yeah no thanks, that sounds like a ticking timebomb.
Living in South Korea sounds like hell.
what a weird system
As morbid as it is to laugh at it. Its kinda ironic how both Koreas had turned into different types of dystopias.
That's incorrect.
ye the helly triangle of animal farm, 1984, brave new world, all united in that little corner of the world.
@chimagamer4157 You're speaking of America, yeah? The place where most of the world's financial crises originate? The place where most of your population live in poverty? The place where your leaders are a decrepit old man and a cackling witch? Where Wall St bends you all over? Where you don't have access to free health care? Where your teachers are convincing their students to turn gay or chemically castrate themselves? Is that the place you're speaking of? You couldn't be speaking of a country that has performed the greatest economic miracle of modern times, the people who are now the richest demographic of Americans? Who exert an overwhelmingly lopsided influence on the world around them?
Yeah, I thought so.
Still SK is richer, and NK is poorer with nukes
South Koreans are now the richest demographic of Americans.
I rented 2 apartments in Korea using this system. The one in Seoul, I arranged. The one in Asan, my company arranged. Both of these worked as expected. Neither of these was in the time of high interest.
Necessity become a luxury, government should intervene
Do I need to increase my deposit if the value of this property has increased? How long can a tenant live in a rented property if he does not want to leave the place?
As the video states, jeonse contracts last for two years. If you reach the end of that contract and you want to stay in the place, but the value of the property has increased, you will indeed have to make up the difference. This is why a lot of people find themselves on a carousel of sorts, having to find a new place to live every two years. It's incredibly nerve-wracking. It didn't used to be this bad, and I remember decades ago thinking that it was a pretty good system, but it's gotten a lot worse--basically due to greed.
There is a cap on how much they can raise the deposit, 20% iirc. We always prepare to save 20% of our jeonse price incase the landlord decides to raise the jeonse but many choose not to deal with the paperwork and are open to negotiation because sometimes it can be very difficult to find new tenants
@@Suho1004 Greed and the desire to take advantage of the situation have always been there, and the fact that jeonse does not work now as it has over the past 60 years is due to the instability of the financial system. During the era of high inflation in South Korea from the 60s to the 2000s, it was more profitable for the landlord to use Jeonse due to the falling purchasing power of the won. And in the early 2000s, when real estate prices began to rise rapidly, Jeonse also turned out to be more profitable for the landlord. For 60 years, landlords have preferred Jeonse and it is unlikely that they will abandon this system in the future when the time comes to break the current financial system. The poor will become even poorer, and the rich will become even richer, regardless of changes and laws that the rich themselves establish for their own benefit.
Correction: Chinese real estate bubbles were not concentrated in a few hands, only a few were big enough to generate global headlines. Two eyewitnesses even found land speculation upon land specuation where people would build sham houses on farms so that they could collected compensation when forced to sell to developers.
People would add a fake second floor to their houses, because that would get significantly more compensation.
Air BnB and our real estate market been really quiet since this dropped.
Great!
Would this be legal in the US? Almost seems like we should have seen it in crazy expensive cities here
There are reverse mortgages, but no one wants them.
It would almost certainly be legal in the USA, but I think it would be almost impossible for a landlord to convince renters to take the loan. We already have security deposits, which landlords in the USA have a terrible reputation about always taking, so I think American renters would be highly suspicious of a landlord not paying back a large rental deposit loan.
I also don't think the incentive is really there for American landlords. It is already common for landlords to take out mortgages, and you can even remortgage partially paid off home quite easily in the USA, so landlords already have a means of converting their home value to a low-interest loan whenever they want to.
@@alexanderbrady5486 As a landlord I would not want to do this. Too crazy and to make money you have to make money from borrowed money on investments (the deposit being the loan, no mortgages on my rentals). No thanks. Rather get my monthly rent.
I don’t think so. If it was it wouldn’t take off. The concept of a “trust me bro” loan instead of rent wouldn’t hold up. I can’t imagine many lenders would give these loans at low enough rates for it to make sense.
The US has a widespread homeless problem cause Americans cant pay rent. You start there.
This system is pretty much only in South Korea.
With population crash, there will not be any new people to take over the rental and give the landlord the $100K, the money is gone as landlord lived off it.
So far, you get it back when a new person pays the $100K, but if empty for years, you would have to sue to get it back, the courts will be overwhelmed, and system will collapse.
Do I need to increase my deposit if the value of this property has increased? How long can a tenant live in a rented property if he does not want to leave the place?
That’s the important point, the birth rate has collapsed in S. Korea. Apartments will be empty like in Japan, or they start to bulldoze buildings like they do in a German towns where there is nobody left.
This system worked in the past to build the economy up to become a modern day Korea. But the government should remove this scheme since early 2000s. This ponzi will ruin Korea one day as the country debt compiles more and many young koreans are already working 2 jobs now
Obviously, NOW is the perfect time for Korea to get rid of this crazy way of renting houses. Not all things that have always been done a certain way are worth keeping!