Korea has a unique housing rental system called jeonse, in which a tenant deposits a large amount of money instead of paying monthly rent to a landlord. The average jeonse price in the country has increased for a record 64 consecutive weeks, prompting outcry from many working-class and lower-income families.

A local economic research institute recently cited the skyrocketing jeonse prices as one of the “four major culprits” behind the sluggish national economy, along with an aging population, growing income disparity, and lack of well-paying jobs. Some experts even argue that unless tackled properly and swiftly, the unbridled increase would ruin the economy by pushing households into heavier debt, which would result in dampening consumer spending and thus hold back the economy.

Government policymakers now seem to be at their wits’ end on how to curb jeonse prices. Since its launch in February, the incumbent administration has put forward a set of measures to cope with them only to see the problem has deteriorated. Offering more loans at lower interest rates has just led to a further rise in jeonse prices, with the total household debt exceeding 1,000 trillion won ($9.3 trillion).

This policy failure was predictable, as administration officials handling the property markets stuck to certain measures that were effective in the past but have become unfit for the changing paradigm of housing and rental price movements.

During the real estate boom, the increase in jeonse prices was usually followed by home prices hikes. Under these circumstances, it made sense to provide tenants with more financial assistance and build more houses. The past prevalence of the jeonse system was based on the long-term trend of high interest rates and the deep-rooted public belief that real estate properties would always be a good investment.

Since the global financial crisis in 2008, however, interest rates have been low and the housing market has remained moribund, with the perception that home prices are unlikely to rise in the long run. Consequently, more landlords have switched to monthly rent from jeonse deposits and most households looking for a home have delayed or given up on their plans to buy a house, pushing up demand for jeonse.

While weighing down on less affluent people, the soaring jeonse prices also run the risk of sparking a chain of debt defaults among landlords and tenants if they take an abrupt downward turn. According to a trade survey, the number of houses in the Seoul metropolitan area that were rented with key money deposits exceeding 90 percent of their estimated sale value climbed from 454 at the end of last year to 8,108 in October. If jeonse prices decline by more than 10 percent, tenants of these homes may fail to get back all of their key money upon the termination of a housing contract. The problem could be more serious if homeowners are saddled with large mortgages.

To prevent the possible catastrophic impacts of the ever-increasing jeonse prices, measures should be taken urgently to draw them down in a gradual manner. In addition to expanding long-term rental housing, various tax incentives should be offered to induce tenants with sufficient financial resources to buy a home. It may also be necessary to consider more unconventional ideas such as providing landlords with more tax deductions in return for refraining from increasing rent prices.