Rental Lessons from South Korea
July 18th 2007 07:21
In a period of high interest rates, owning a home is an expensive affair and in addition to shortage of housing, especially in Melbourne, rents have skyrockected that prevent many from affordable and decent housing.
In the case of renting, rent payments are not recoverable and certainly non tax-deductible and if there is an intention of owning a home eventually, savings is a must in order to build a stash for downpayments. In the end a significant portion of income is lost to renting and savings, generally speaking.
It seems that landlords are the ones benefitting.
Perhaps we could take a lesson or two from South Korea in terms of house renting where both parties apparently benefit from the rental deal. In South Korea, during periods of high interest rates, a unique lease mechanism known as Jeonse works out for both the renter and landlord. Jeonse refers to a lumpsum deposit, usually between the property market value of 50% to 100%, provided by the renter on a contract that generally runs from two to three years. The deposit received by the landlord will then be invested in term deposits. Once the lease ends the entirety of the deposit will be returned to the renter.
Though it sounds fair but the downside is that the renter's lumpsum deposit could lose its purchasing power at the end of the contract but something is better than nothing as in the case of traditional rent agreements where none of the payments are recovered at all. In the case of Jeonse the renter at the very least still have a significant portion of cash for downpayment in the event of property purchase, given if inflation rates were relatively stable.
Traditional rental mechanism usually is the form during periods of low interest rates but with a 10% recoverable deposit upfront and then monthly rent payments. This practice is known as Weolse.
The system acts as tool to smoothen the effect of interest rates and also produce a win-win situation for both parties in the property market. But of course the financial returns for the landlords have to be taken into consideration and its only workable if Jeonse produce better returns. So work the math out first.
In the case of renting, rent payments are not recoverable and certainly non tax-deductible and if there is an intention of owning a home eventually, savings is a must in order to build a stash for downpayments. In the end a significant portion of income is lost to renting and savings, generally speaking.
It seems that landlords are the ones benefitting.
Perhaps we could take a lesson or two from South Korea in terms of house renting where both parties apparently benefit from the rental deal. In South Korea, during periods of high interest rates, a unique lease mechanism known as Jeonse works out for both the renter and landlord. Jeonse refers to a lumpsum deposit, usually between the property market value of 50% to 100%, provided by the renter on a contract that generally runs from two to three years. The deposit received by the landlord will then be invested in term deposits. Once the lease ends the entirety of the deposit will be returned to the renter.
Though it sounds fair but the downside is that the renter's lumpsum deposit could lose its purchasing power at the end of the contract but something is better than nothing as in the case of traditional rent agreements where none of the payments are recovered at all. In the case of Jeonse the renter at the very least still have a significant portion of cash for downpayment in the event of property purchase, given if inflation rates were relatively stable.
Traditional rental mechanism usually is the form during periods of low interest rates but with a 10% recoverable deposit upfront and then monthly rent payments. This practice is known as Weolse.
The system acts as tool to smoothen the effect of interest rates and also produce a win-win situation for both parties in the property market. But of course the financial returns for the landlords have to be taken into consideration and its only workable if Jeonse produce better returns. So work the math out first.
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