Restrictions on Property Rights: Benevolent Intent, Disruptive Outcome - The Conundrum of South Korea’s Chonse(전세) Reform

Abstract

This article discusses South Korea’s recent property law reform (affecting “Chonse”) and its unintended impact on the housing market. Chonse is a unique and prevailing residential lease found only in South Korea. Under a Chonse contract, a lessee makes a one-time deposit with the lessor, the amount of which equates to a substantial portion of the property value; in exchange, the lessee is permitted to lease the property free of rent and reclaim the deposit on the expiration of the lease. This unique leasehold system has existed for several economic reasons. Recent developments render the future prospect of Chonse uncertain; housing costs have been rapidly increasing in South Korea, particularly in the City of Seoul, generating financial pressure on lessees. In response to this price hike, the South Korean government has undertaken controversial law reform that imposes a cap on annual rent increase, including Chonse deposit amount, and also mandates one-time renewal of residential lease for additional two years, in efforts to assist lessees and stabilize the housing market. This law reform, however, has caused unintended disruption in the housing market and a shortage of residential properties available for Chonse. The author has previously introduced Chonse in a co-authored article and examined its historical origin, legal elements, and future prospects. This article, building on the author’s previous work, analyzes the socioeconomic impact of Korea’s recent Chonse reform. The article adopts the “General Theory of Law and Development” and explains why the law reform has resulted in unintended outcomes. The article cautions against the (well-intended) attempt to restrict property rights resulting in disruptions in the housing market and increasing costs for Chonse lessees.