rental market re- structuring in south korea the decline of chonsei and its implications richard...
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RENTAL MARKET RE-STRUCTURING IN SOUTH KOREA
THE DECLINE OF CHONSEI AND ITS IMPLICATIONS
Richard Ronald University of Amsterdam & University of Birmingham & Mee Yoon JinLand and Housing Institute, South Korea
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• The Korean miracle: from 3rd world to 1st 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’: 1995 peak @
63.6% of rental sector, 29.7% of housing
• Wolse: monthly rent for very low income people
• Chon-wolse: hybdrid tenure
THE KOREAN RENTAL SYSTEM
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THE SHIFTING TENURE BALANCE
• While home ownership growth has flattened…
• Chonsei declined 63.3% - 47.3% of renting ( 1995-2010)
• Chon-wolse increased from 23.3% in 2000 to 37.9% in 2010
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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
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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 2006-
2012
• 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% (2007-2010)
WHAT’S CHANGING?
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• 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
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2000 2005 20100%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
14.3 12.7 11.6
48
33.427.6
22.5
38.3 48
11.1 11 8.9
2000 2005 20100%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
38.7 39.3 36.8
42.134.9
34.3
12.218.7 22.6
Free rent or other
Monthly rent
Monthly rent with deposit
Chonsei
Owner-oc-cupied
Is a Korean Generation Rent Emerging?
30-39 years old
29 years old and under Figure: South Korean Tenure by age cohort
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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% -
13.2%, 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% 2000-2006– Chonsei Montly Rent Conversion Rate – (CMR-CR)
means families pay more for housing
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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
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• 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
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• 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!