Financial repression and housing investment: An analysis of the Korean chonsei

South Korea has a unique kind of rental contract, called chonsei. The tenant pays an upfront deposit, typically from 40% to 70% of the property value, to the landlord, and the landlord repays the deposit to the tenant upon contract termination. The tenant is not required to make any periodic monthly rental payments. The main goal of this paper is to show why such a unique rental contract exists and has been popular in Korea. The model shows that chonsei is an ingenious market response in the era of “financial repression” in Korea (Renaud, 1989), allowing landlords to accumulate sufficient funds for housing investment without major reliance on a mortgage. The model also shows that the tenant, who suffers from insufficient mortgage borrowings, can access cheaper rental housing via chonsei than when only monthly rental housing is available. The model predicts that the chonsei system should fade out when arbitrage gains from housing investment disappear. An implication of the model is that the chonsei renter may save while the landlord and the owner-occupier put all their assets into housing and thus have no financial savings. This hypothesis is empirically tested and confirmed.