South Korea's Household Debt Crisis: The Role of the Unique Jeonse Rental System

South Korea's household debt crisis has been a growing concern for policymakers and economists alike. As of 2024, the country's household debt to GDP ratio stood at a staggering 91%, according to the Bank of International Settlements. This high level of debt has raised alarm bells about the potential risks it poses to the economy. One factor that has contributed to this crisis is the unique rental system in South Korea, known as Jeonse.

The Jeonse rental system is a unique aspect of the South Korean housing market, where renters pay a large upfront deposit, known as "jeonse," instead of monthly rent. This deposit, typically around 64% of the house price, serves as an interest-free loan for landlords, who can invest it elsewhere. However, this system often requires renters to take out loans to fund the jeonse deposit, increasing their debt burden.



The Jeonse system has several implications for South Korea's household debt crisis:

1. High upfront costs: The large upfront deposit required for the Jeonse system often forces renters to take out loans, increasing their debt burden.
2. Interest-free loans for landlords: The jeonse deposit serves as an interest-free loan for landlords, encouraging them to participate in the system and driving up demand and prices.
3. Distorted capital allocation: The Jeonse system leads to more capital allocation to the housing sector, potentially distorting the overall economy and resulting in less investment in other productive sectors.
4. Housing market instability: The Jeonse system contributes to housing market instability. When interest rates rise, renters struggle to repay their loans, leading to a potential housing market crash.
5. Potential economic catastrophe: High household debt levels, exacerbated by the Jeonse system, pose a significant risk to the South Korean economy. In the event of a credit crunch or economic downturn, borrowers may not be able to repay their debts, leading to deflationary pressures and a recession.

To address the household debt crisis in South Korea, policymakers must consider the unique aspects of the Jeonse rental system and its impact on the housing market and the broader economy. By understanding the root causes of the crisis and implementing targeted policies, South Korea can work towards mitigating the risks posed by high household debt levels and promoting more sustainable economic growth.

In conclusion, the unique Jeonse rental system in South Korea has played a significant role in the country's household debt crisis. By understanding the implications of this system and addressing its underlying issues, policymakers can work towards stabilizing the housing market and reducing the overall debt burden on South Korean households.