Putting a ceiling on housing costs: The aftermath of nationwide rent control in the case of jeonse system in Korea

Abstract

• Rent control policies cause adverse impacts on the real estate market . • The new amendment to Korea's rent control policy in 2020 capped rent increases at 5 % during lease renewals. • This policy led to a 17.7 % increase in rental costs for tenants in the Greater Seoul area over a 2-year period and the response was persistent. • Following the implementation of the new rent control policy, there has been a significant shift from pure jeonse contracts to types of leases. We examine the impact of tenant protection policies on the rental housing market in Korea. Three regulations were enacted in 2020 to reduce the burden of rent and to protect the right to renew a rental agreement. These 1) put a cap on rent increases at 5 % at lease renewal; 2) require registering all leases; and 3) empower tenants to renew leases for an additional 2-year period. Using detailed rental contract information, this paper aims to investigate the impact of the rent control policies and the changes in tenants’ lease types. We find that the policies increased average rent in Greater Seoul by 17.7 % in the 2-year period post the effective date of the policies, and the impact is persistent. The negative impact on rental housing affordability is not limited to specific districts. However, districts with lower income levels experienced slightly higher increases in rental deposits. Moreover, we find a significant shift in contract mode, with a lower number of pure jeonse contracts and a marked increase in other lease types including a mixture of lump sum deposit (the jeonse system) and partial monthly payments.