Buyers should compare the actual cost of living in a home they own with the cost of renting rather than stretching their finances to buy on the expectation that prices will rise, a market analyst said.
Lee Hyun-chul, head of the Apartment Cycle Research Institute, said on his YouTube channel on the 21st that the long-held view that renting is a waste of money holds up only if home prices climb. "The argument that you lose money by living in jeonse (a Korean lease system requiring a large lump-sum deposit instead of monthly rent) works because it assumes home prices will rise," he said. "If prices stop rising or start falling, jeonse is far more advantageous." The remarks were reported by the real estate industry on the 23rd.
Lee compared costs for a two-year stay in the same home, assuming a purchase price of 1 billion won (about $690,000) and a jeonse deposit of 500 million won. He assumed the household had 500 million won in assets and faced an annual lending rate of 5%.
A buyer would need to borrow the remaining 500 million won. At 5%, that comes to 25 million won in interest a year, or 50 million won over two years. Adding an acquisition tax of 33 million won, property tax of about 1.5 million won and brokerage fees of about 5 million won brings the two-year total to 89.5 million won.
A jeonse tenant, by contrast, could cover the deposit with the 500 million won on hand and would pay no loan interest. Apart from brokerage fees of about 1.5 million won, there would be almost no additional cost over two years. On a simple comparison, the gap between buying and renting over two years reaches 88 million won. The calculation assumes no change in home prices and no other costs.
"You have to run a cost analysis of buying versus renting on the assumption that prices will not rise," Lee said. "In the current market, there may be no need to stretch to buy a home."
He also offered a different view on housing stability, often cited as a benefit of owning. Tenants worry about having to move each time a lease expires, he said, but they can also raise the deposit and stay put.
Lee gave an example in which moving costs about 5 million won and the jeonse deposit rises by 50 million won at renewal. Borrowing that increase at 5% would add 5 million won in interest over two years, roughly the same as the cost of moving. The point, he said, is to weigh the burden of a higher deposit against the cost of moving and see which works out better.
He also warned of losses that can follow a leveraged purchase. If a household buys a 1 billion won home with 500 million won of its own money and prices fall 10%, the value of the home drops by 100 million won. Prices fell 10%, but measured against the household's own money the loss rate reaches 20%. The larger the loan, the bigger the loss relative to the buyer's own funds when prices move.
"No asset only goes up; there are times when prices fall," Lee said. "If you are going to buy a home, you have to factor in at least this much." He added: "The market is mixed right now, and if anything the chance of a decline has risen a great deal. If you rush into buying a home without a cost analysis, you could be taking on a big risk later."