Housing investment, default risk, and expectations: Focusing on the chonsei market in Korea

This paper notes that the Korean chonsei lease contract, in which the tenant provides a lump sum deposit equivalent to a large part of the housing value to the landlord for the contract period, is in effect a mortgage provided by the tenant to finance the landlord's housing investment. The paper presents a model for deriving the size of the equilibrium chonsei deposit by incorporating the default risk of chonsei for the first time. Using the mortgage-market equilibrium model with default costs, this paper explores the link between default cost, house price expectations of the landlord, and the chonsei deposit. The model shows that the higher is the landlord's default cost (the less risky he/she is), the smaller is the chonsei deposit, while the more favorable are the expectations for future house prices, the greater is the chonsei deposit. The predictions of the theoretical model are tested and confirmed using bank data and survey data. The limitations of the empirical approach of existing studies are overcome by taking advantage of the survey data.