In East Asia, China is not the only country where “high housing prices” make people “daunting”.

For example, in Seoul, South Korea, the high housing prices were once staggering. In 2021, the price of apartments in downtown Seoul has reached 22,000 US dollars per square meter, second only to Hong Kong, China and New York, ranking third in the world, and even maintaining a 5% price increase during the epidemic.

However, this glamorous price list was broken this year. In addition to the overall decline in housing prices, nearly a thousand real estate companies declared bankruptcy from January to April, and quickly affected the lives of ordinary people.

In April 2023, a Korean girl named Park Hee-soon decided to die. The last straw that broke her back was a water bill reminder of 60,000 won, equivalent to RMB 338.

Before that, she was the youngest Asian Games track and field athlete in South Korea. In the later stage of her career, she spent 90 million won to rent an apartment in Incheon, determined to start her new life, but the owner of the fully rented house who absconded with the money broke her hope for life.

1. Specialty of the Korean housing market: “fully rented house”

Although it is very important to own a house of your own in the cultural context of China, such a cultural concept is not absolutely applicable in South Korea. For Korean residents, renting a house is far more suitable than buying a house, and this comes from the special system of the Korean market – fully rented house.

Today, the so-called fully rented house is to exchange “security deposit” for “right of use”. Specifically, it means that after the tenant pays the landlord a deposit of more than 50% of the full price of the house, he can get the right to use the house “for free”. In addition to daily living expenses, he no longer pays rent. After the lease period ends, he can get back the full deposit paid at the beginning.

This is equivalent to a “monthly rent” policy that exaggerates costs and magnifies discounts. Obviously, long-term rent is always cheaper than short-term rent, and it is always easier to get discounts for one-time rent than monthly rent – but in South Korea, the one-time rent will be more (50%~80% of the full price of the house), and the one-time discount will be greater (rent-free for about two years).

So since they have to make a large one-time expenditure, why don’t these tenants just try to buy a house directly?

In fact, in order to avoid excessive speculation in real estate, the Bank of Korea has restricted the requirements and quotas for home purchase loans, which makes it impossible for most Koreans to pay a high purchase price in one lump sum, and it is difficult to obtain their own property through loans – of course, the high loan interest is also a major reason why they choose to give up buying a house.

At the same time, the deposit loan business for fully rented houses is very hot. The ultra-low interest rate loans provided by banks to fully rented households were once only 1%, which indirectly pushed tenants who lack principal to move towards the fully rented market.

Since there is no need to pay extra rent, in the full rental model, the deposit paid by the tenant is more like a fixed deposit with no interest in the hands of the landlord, and the tenant only needs to pay the interest on the bank loan. When the bank interest rate is not high, it is obviously a more cost-effective deal to use interest instead of rent than “monthly rent”.

For landlords who are good at planning, the high deposit collected in one go is the best investment capital – for example, buying a new property and then continuing to rent it to new tenants who are willing to pay the deposit, and repeating the cycle to form their own “real estate empire” in the bubble. In fact, under the model of “renting old houses for new houses”, there are many landlords in South Korea who own hundreds of houses.

For this reason, although “full rental” is a rental system, it is actually closely related to the real estate purchase market.

2. Full rental: a solution to the housing problem

Historically, South Korea’s full rental system originated from the “pawn system” of land. Since farmers are reluctant to sell their land directly, when they need money, they prefer to “mortgage” the right to use their land, that is, transfer the right to use the land to obtain money, and then return the money and regain the right to use the land after the expiration of the term. With the development of the economy, the objects of transactions have gradually expanded from land to houses.

Although full rental housing is more like a mutual assistance activity among residents when it first appeared, for the government, the promotion of full rental housing helps solve the problem of urban housing and is one of the important measures to solve the housing demand problem of low-income and middle-income families.

During World War II, a large number of rural populations in South Korea poured into cities, resulting in insufficient urban housing supply. In the case of difficulty in purchasing real estate, a rental model was formed in which valuable items such as antiques were mortgaged to obtain housing rights. Farmers who sold their rural houses and were eager to develop in cities but could not afford urban real estate, and urban groups who owned urban real estate but were short of funds, hit it off, effectively alleviating the contradiction between the increase in urban population and urban housing.

With the advancement of post-war reconstruction and urbanization, housing problems reappeared. Since the full-rental model can not only collect rent in one go to avoid risks, but also quickly raise funds, it has become the preferred rental method for homeowners.

After entering the stage of modernization, the solution strategy for urban housing problems seems to be solidified and single: encourage the purchase of self-occupied housing, establish a stable rental market or provide a sufficient number of government-subsidized housing. Obviously, big cities are always overcrowded, and housing prices are always high. Forcing the government to make a one-time large-scale expenditure seems too idealistic, and a stable rental market has become the only choice.

As mentioned above, the full-rental model adapts to the needs of both parties of the rental model, and therefore has a good “civilian foundation”. For the government, the promotion of full-rental is not only conducive to solving urban housing problems, but also to reducing the heat of the real estate market, thereby curbing the continuous rise in housing prices-when the advantages of renting are obvious, some people who tiptoe to buy houses will no longer participate in it, and the “speculation and speculation” of real estate will be curbed by changing the supply and marketing relationship.

3. The straw that broke the camel’s back

However, full rental housing is not without risks. The biggest problem is the overabundance of real estate “bubble”. For example, the price reduction storm faced by the Korean real estate market today, and in this storm, many people believe that the full rental system should be responsible for this.

Why?

As we analyzed earlier, full rental housing links tenants and landlords on one end and banks on the other end – in the entire process of buying and renting, both landlords and tenants need to borrow money from banks to realize the activities of buying and renting houses. In other words, the operation and maintenance of full rental housing depends on the appreciation of real estate on the one hand and on the low bank interest rate on the other.

However, the fact is that with the Fed’s interest rate hike, “businessmen” with investment capabilities are more inclined to exchange dollars to catch up with the direct train of asset appreciation, and the Korean government has to raise bank interest rates to avoid this part of the capital outflow. However, in order to avoid losses, banks’ lending rates are often as high or low as deposit rates, which naturally causes the lending rates to rise.

The first to be affected are tenants. The increase in bank interest rates means that the interest on the loan used to pay the deposit will rise. When the interest to be paid may even exceed the monthly rent, more people will choose to terminate the lease early, recover the deposit and repay the bank loan.

Since the property is obtained through the landlord’s loan from the bank, in the face of a large number of terminations in the short term, the landlord can only choose to sell the property to obtain funds to repay the deposit, and the house price will face further decline.

Obviously, due to the shrinking value of the property, the landlord can neither repay the deposit on time nor in full. As a disadvantaged group of tenants, they not only face homelessness (the house is auctioned by the landlord or taken back by the bank), but also face high bank loans (high deposits borrowed from the bank). Full rental has also become the last straw that crushes ordinary people under the blessing of double leverage.

In Incheon, South Korea, from February to April, two men left suicide notes and bid farewell to the world one after another. And these two men, and Park Hee-soon, rented the same house of the “Incheon Real Estate King”.

There is a saying that a grain of sand in the era becomes a mountain when it falls on ordinary people. Perhaps under the wheel of the times, most ordinary people are just a speck of dust.