Financial Frictions and Housing Market Outcomes: A Korean Example
Jeonse is a Korean rental system without periodic payments from renters to landlords. Only a Jeonse deposit, historically often between 40 and 80% of the property value, changes hands. At the end of a contract, its nominal value is redeemed. The landlord is allowed to invest the deposit money without restrictions. We build a DSGE model to investigate causes and welfare effects of the system's existence. Our hypothesis is that financial frictions such as imposed low loan-to-value ratios for mortgages have been responsible for the strong position of Jeonse contracts in the Korean rental market for years. We want to quantify welfare gains from the liberalization of mortgage financing that started in the mid 90s.