Controversy over 9-year charters, charter class like you've never seen before?

the proposed amendment to the 9-Year Residential Leasehold Protection Act is expected to reduce the number of rental properties and accelerate rental gentrification. learn how the 3+3+3 Rental Act will change the real estate market and what you can do about it.

key points of the 3+3+3 Lease Amendment Bill

the recent proposal to amend the Residential Lease Protection Act to guarantee lease terms of up to nine years is expected to have a major impact on the real estate market.

the bill, which was co-sponsored by 10 lawmakers from the Democratic Party of Korea, the Grand National Party of Korea, and the Progressive Party of Korea, led by Representative Han Chang-min, a member of the National Assembly's Political Affairs Committee, on February 2, would increase the lease term from the current two years to three years and allow the right to renew the lease up to two times.

the change to a maximum of nine years of residency, compared to the current four years of renewal rights, is likely to have a significant impact on the rental market.

to further protect tenants, the amendment requires landlords to disclose national and local tax payment certificates, as well as health insurance premium payments. In addition, if the home is transferred to a third party, the new landlord's personal and financial information must be notified to the tenant.

security deposits would also be capped at no more than 70 percent of the home's value to minimize the risk of tenants losing their deposits.

while lawmakers argue that this will create housing stability and information transparency for tenants, the market is already concerned about the negative side effects of fewer rental listings and the increasing commercialization of rentals.

already shrinking rental market, concerns about the introduction of the 9-year system

the current rental market is already experiencing significant disruption due to the real estate measures announced on October 15th.

the measures included strengthening the residency obligation to block gap investments and applying the Gross Debt-to-Income Ratio to all rental expenditures, which could exacerbate the rental shortage. with the designation of 12 areas across Seoul and Gyeonggi Province as regulated areas, lending restrictions and stricter residency obligations are expected to significantly reduce the amount of rentals on the market.

according to real estate big data platform Asil, the number of apartment rentals in Seoul has dropped by 23.3 percent this year, from 31,814 on January 1 to 24,418 as of October 17.

under these circumstances, if charter contracts are extended to up to nine years, charter properties are bound to disappear from the market even faster, as tenants staying in the same home for longer periods of time naturally means fewer properties on the market.

landlords don't like the idea of having their money tied up for nine years either. with interest rates high, there's no reason to sublet if you can't access your money for that long. instead, we're likely to see an acceleration in the move towards renting or flipping to free up liquidity.

in fact, we're already seeing a clear trend of subletting. according to data from the Court Registry Information Square, the percentage of lease-to-rent transactions increased from 40 percent in 2020 to 47.1 percent in 2022 following the implementation of the Lease2 Act, and surpassed 50 percent in 2023. this year, it surpassed 60 percent for the first time ever.

lessons from the Rent Act 2: Does history repeat itself?

the right to renew and the rent cap were introduced in 2020 to protect tenants, but they had the opposite effect: skyrocketing rental prices and fewer listings.

according to a joint study by the Korea Land Institute and the Civil Law Society, Seoul apartment prices rose just 3.86 percent in the year prior to the law's implementation, but surged 8.13 percent in the year and a half afterward.

as landlords sought to price in future rent increases, a dual pricing phenomenon emerged, where the security deposit gap between renewals and new contracts widened significantly.

as the rental shortage intensified, many tenants were unable to save a deposit and were pushed into subletting or renting, further increasing their housing costs.

the consensus view among experts is that the 3+3+3 system is likely to replicate this situation in a more severe form.

one real estate expert warned that with new supply scarcer than it was in 2020, a shift to longer-term contracts would lead to a faster decline in the number of rental units and a spike in prices to levels never seen before.

another expert pointed out that this long-term structure would lead to a triple whammy of higher deposits, fewer transactions, and higher costs for tenants, which would only make housing more unaffordable for the average person.

experts offer practical solutions

market experts agree that it is more realistic to promote housing stability through supply expansion and tax flexibility rather than long-term contracts to protect tenants.

increasing the supply of new rental housing, rather than prolonging subletting, is the fundamental solution, they argue. they argue that reinstating landlord registration incentives and easing tax burdens to encourage rental supply will help balance the rental market.

others argue that we need to reduce the financing burden on tenants by easing subletting regulations and expand the supply of public rental housing to ensure housing stability for low-income households first.

above all, it is argued that we need a balanced policy that is acceptable to both landlords and tenants, rather than regulations that overly restrict market functioning.

the bill, which guarantees rental contracts for up to nine years, has been criticized for ostensibly protecting tenants, but in reality, it could stifle market functioning, leading to a vicious cycle of reduced rental supply, higher security deposits, and accelerated gentrification.

with the fallout from the Rent 2 Act of 2020 still unresolved, it's too soon to ignore the warning that a similar policy experiment could lead to an unprecedented surge in rentals.

frequently asked questions

Q. when will the nine-year charter ban go into effect?

A. The bill is still in the form of a proposal and needs to be vetted by parliament. Whether or not it will pass and when it will be implemented is uncertain, but the market is already concerned about the possible negative effects.

Q. will the 9-year lease increase rental prices?

A. Based on past experiences with the implementation of the Rent2 Act, it is likely that sublease prices will spike due to a decrease in rental inventory. landlords may be reluctant to sign long-term contracts and may charge higher security deposits or switch to renting.

Q. i'm currently in a sublease, will the 9-year rule apply?

A. It is expected to apply to contracts entered into after the law is enacted. however, specific implementing and transitional regulations will need to be confirmed after the law is passed.

Q. how will the switch to renting affect tenants?

A. Although the burden of saving money will be reduced, the overall housing cost burden may increase due to the fixed monthly expenses, especially when interest rates are high.

Q. what policies are needed to address the rental shortage?

A. There are many opinions that supply-oriented policies are needed, such as expanding the supply of new rental housing, reviving incentives for landlords, easing subletting regulations, and expanding public rental housing.

conclusion

the 9-year lease is a policy that claims to protect tenants, but has the potential to distort the market and exacerbate the rental shortage. it's time to learn from the lessons of the Rent 2 Act and develop a balanced policy that increases supply.

let us know your thoughts on the 9-year lease in the comments. if you're curious about changes in the real estate market, subscribe and set up alerts to stay up to date.