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Law and Economics


Rental Housing Policy in Response to the Increase in the Share of Wolse (Monthly Lease)

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  • Author SONG. Inho
  • Date 2017/09/20
  • Series No. KDI FOCUS No. 86, eng.
  • Language English
SUMMARY □ In Korea, jeonse is continuing to decrease while monthly leases (‘wolse’ in Korean) increase, particularly among the young and senior populations. Indeed, compared to other age groups, they face larger financial and credit constraints. Thus, a market for wolse with deposit must be created with quality homes and varying deposits to establish a broader range of housing choices for these groups. To that end, policy efforts are needed to eliminate any loopholes in support programs in order to secure housing stability for senior wolse tenants who are in the bottom income decile.

- Low interest rates cause jeonse lessors to increase the deposit or convert to wolse with deposit.

- Lessors make use of their strong bargaining power to induce tenants to choose wolse instead of jeonse amid the growing trend of high jeonse deposits.

- The RIR of wolse tenants is higher than that of jeonse tenants.

- The rental housing market is exhibiting a continued trend of decreasing
jeonse and increasing wolse particularly among the young and seniors.

- The level of monthly income of the young and seniors is mostly lower than other age groups.

- The RIR of young and senior wolse tenants is higher than that of other age groups.

- Almost a half of senior wolse tenants in the bottom income decile were found to spend over 50% of their income on housing.

- Most young and senior tenants live in multi-unit housing or ‘other housing’ with poor service quality.

- Of senior wolse tenants in the bottom income decile (D1), an estimated 73,000 are excluded from the government housing support program.

- The financial resources for the rental housing policy need to be distributed to vulnerable groups such as low income and senior households.

- A rental housing market must be created where financially burdened tenants can choose from a variety of quality wolse homes with varying deposits.

- The New Stay project needs to shift its focus towards using existing rental apartments (unoccupied) instead of building new ones.
KDI VOD Report
The share of monthly leases, or wolse (월세) in Korean,
is making a notable increase in Korea’s rental housing market,
marking 60.5% as of 2016.

Meanwhile that of jeonse(전세), or lump-sum deposits without monthly rent,
is on the decline.

A major driver of the growth in wolse is low interest rates.

To be more specific,
low rates mean low returns, and ultimately, this means less profit to the lessors.

Moreover, Facing rising jeonse prices and tenants’ limited options,
the rental market gives the bargaining power to lessors

The increasing share of wolse is particularly noticeable
among the young and senior populations.

This is because both age groups shoulder a bigger burden
in terms of financial and credit constraints, and have a narrower choice of housing.

In addition,
although wolse has a smaller deposit compared to jeonse,
the monthly rent payments can weigh heavily on households’ housing expenditure.

The proportion of housing expenditure in current income can be understood
through the rent-to-income ratio, or RIR.

Low-income young and senior wolse tenants have a higher RIR than other age groups,
posting 34.2% and 37.7%, respectively.

In particular, it was found that seniors in the lowest first and second income decile
were spending over 50% of their monthly income on housing.

That means, of a monthly income of 500 thousand won, 250 is spent on housing,
which leaves only 250 for living expenses.

A high RIR such as this could pose a risk to housing stability.

Moreover, according to the 2016 Korea Housing Survey
by the Ministry of Land, Infrastructure and transport,
even when those living in public rental housing
or receiving government housing allowance are excluded,
73,000 senior wolse tenants in the lowest income decile
remain neglected from housing support.

As a result,
measures are urgently needed to provide such vulnerable groups
with the necessary support.

(Housing Support for Low-income Seniors)
Many low-income seniors, who are overlooked by the housing support system,
do not realize that they are eligible for support.
Additionally, there are cases where the local government fails to inform them
or the support does not reach them as they have not reported their income.

Accordingly, local governments, the Korea Land & Housing Corporation (LH)
and Korea Inclusive Finance Agency must work in unison to integrate their databases.
Also, the rental housing policy must prioritize vulnerable groups such as
low-income seniors above all others to enhance the efficiency of resource distribution.

(System Improvements to Create a Quality Market
for Wolse with Deposit for Young Population)
For the young population,
efforts must be made to reduce the financial burden of large lump sum payments,
and the wolse-with-deposit market should be expanded to
provide apartments with quality housing service
and varying deposit amounts in order to widen the housing selection.

Finally, the income tax on rental housing system currently only applies to
wolse lessors with two or more homes and jeonse lessors with three or more homes.
This can induce lessors to covert to the latter.
As such, a legal reform should be implemented to have a regulatory balance
between the jeonse lessors and the wolse lessors.
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