Two rental systems in Korea and their macroeconomic drivers

Abstract

This dissertation conducts an in-depth examination of South Korea's unique rental housing market, with a particular focus on the two predominant rental systems – the Wolse (WS) and the Jeonse (JS) systems. The WS system bears similarities to traditional monthly rental arrangements found in other countries, wherein tenants are obligated to provide an upfront deposit, typically amounting to approximately 15% of the property's value, alongside regular monthly rental payments throughout the tenancy period. However, the substantial deposit requirement in the WS system exposes tenants to a heightened risk of financial default compared to conventional monthly rental models. In contrast, the JS system operates on a distinct premise, requiring tenants to furnish a substantial lump-sum deposit, generally equating to around 62% of the property's overall value. This sizable deposit secures the tenant's occupancy for a fixed two-year term, after which the deposit is returned in its entirety, provided the property remains in its original condition. While the JS system eliminates the risk of defaulting on monthly payments for landlords, it transfers a significant financial burden onto tenants, who must amass a substantial upfront sum while facing the potential risk of landlord default and the inability to recover their deposits upon lease expiration. The methodology employed in this study encompasses a comprehensive literature review, a theoretical analysis of each rental system, and a comparative evaluation of the WS and JS systems. The research employs the Ordinary Least Square Regression method for data analysis, enabling a rigorous examination of the factors influencing the choice between these two rental systems. The dissertation concludes by emphasizing the critical importance of comprehending the nuanced nature of each rental system for all participants in South Korea's housing market. The choice between the WS and JS systems carries profound financial and legal implications for both tenants and landlords, necessitating a thorough understanding of the inherent risks and advantages associated with each system. The research aims to provide valuable insights to inform policy formulation, risk assessment, and decision-making processes within the rental housing market, ultimately contributing to its improvement and sustainability.