In the Korean mortgage system consumers have to pay approximately 80% of the
home price up front, and pay the remaining loan in 5-20 years. So majority of consumers cannot afford to purchase expensive finishes when they initially buy their apartment. The US manufacturers report that consumers are beginning to replace domestically produced interior goods with US-made goods because they are not satisfied with the quality of domestically produced goods.
Housing Market In Korea
The housing market in Korea is very special in nature and is called chonsei; its literal meaning is the 'total rent.' In case of the chonsei system, the tenant pays an upfront lump-sum amount of deposit to the owner for the use of the property with no additional requirement for periodic rent payments.Interest earnings on the lump sum deposit income to the owner during the contract period.
The deposit is then returned to the tenant when the contract expires, otherwise the owner is in breached of contract and the Korean legal system grants the tenant a right of full control over the property until the owner returns the deposit. That is, the deposit money of tenant is legally protected as an asset that can be claimed against the collateral value of the property.
Housing Process In Korea
In the periods of the Korean conflict, many of the national housing stock and economic infrastructure are being destroyed and caused the Korean government to make restrictions to the housing finance market so as to channellize credit into the industrial sector for several decades. Still the mid-1990s, homeownership opportunities financed via mortgage loans was possible to most households in Korea.
The housing finance system chonsei has been widely spreaded in Korea, with the rapid urbanization for the last few decades.
The Population and Housing Census Report (2000) has stated that the total number of households in Korea is 14.31 millions, out of which 7.75 million (54%) are homeowners and 4.04 million (28%) are under chonsei contracts (the remaining households are under monthly rents).
The housing system chonsei works in a way that effectively allows owners to leverage their investments by pulling out significant deposits that are used to purchase additional properties. It also allows owners to skirt government rental price controls and ownership restrictions.
The chonsei contract wipes out the likelihood of tenant's default on the rental payment as the deposit is maximized till periodic rents are zero.
Chonsei System in South Korea.
This system is more beneficial for the landlords and the tenants as well.
For the landlords
The chonsei is regarded as a financial instrument, which satisfies many household's credit demands.
Able to use the chonsei deposits to fund other investments e.g. real estate purchases or capital for businesses.
In the view of the tenants
As long-term mortgage loans are not widely available in the country rather chonsei becomes the tool of building equity for buying a house.