Young investors on verge of financial collapse from poorly-timed property investments - 코리아타임스

Apartment complexes in Seoul are seen in this June 25 file photo. Yonhap

By Lee Min-hyung

A 35-year-old office worker who wished to be identified only by his surname Kim advises his colleagues and friends never to invest in a housing market in a bullish cycle, as he is paying the most painful price in his lifetime after purchasing multiple homes a couple of years ago.

He took advantage of a jeonse leveraged investment when buying residential real estate mostly in 2020 and 2021, when the housing market was at its peak. The investment is a unique one rarely seen in other countries. Jeonse is a type of housing rent that most tenants in Korea prefer, as they do not have to pay monthly rent to landlords and don't have to commit to ownership. Instead, they give a lump-sum deposit that is, in most cases, fully refunded when the lease expires.

Young property owner-investors engaged in a mass buying spree of apartments back then by using their tenants' jeonse deposits in hopes that the housing market would continue its bullish rally.

"Unlike stock investments, the jeonse leveraged investors have to pay back a huge sum of money to tenants on the day of expiration, and this typically amounts to hundreds of millions of won," Kim said. "But most investors expected the price rise of not just the invested assets, but the rental fees, so some of them purchased multiple homes by using the deposits from tenants. Unfortunately, the bullish cycle came to an abrupt end in 2022 and both the housing and rent prices have been nosediving for the past two years," he said.

"Those who invested in only one home can mostly endure the price fall, but this is not the case for multiple homeowners who have to pay back the deposits sequentially. As the government is adopting a tight debt services ratio (DSR) regulation, some of them have to turn to high-interest private moneylending to return the deposits. If they fail to do so, the homes are immediately put up for auction."

He is considering selling off one of his properties at a loss of around 100 million won ($76,400), as accepting the financial loss would be better for him than facing ever-increasing stress by continuing to service the debt on the property.

Amid the growing concerns over the issue, the government is considering easing DSR rules for homeowners who need to return rent deposits to tenants. Any individual borrowers are subject to a 40 percent DSR cap rule here. This means their annual principal and interest payments on all loan products ― including mortgage and non-collateral loans ― must not top 40 percent of their annual income.

But with the housing and rent prices plummeting since last year and showing no clear signs of rebounding, homeowners who cannot return rent deposits have no choice but to shoulder the loss when their property is put up for auction.

Experts said the government has no specific cards to play for now, and the investors have to pay the price for their poorly timed investments.

"Even if the issue escalates into a more serious social problem, the government and authorities cannot intervene directly, as some homeowners may make ill use of possible deregulatory measures and repeat the same investment again," said Kwon Dae-jung, a professor of real estate at Myongji University.

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