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Optimal chonsei to monthly rent conversion choice given borrowing constraints

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  • Ahn, Seryoong
  • Ryu, Doojin

Abstract

Chonsei, an exceptional but prevalent housing rental system in the Republic of Korea, functions as private loans between individuals, and its implicit interest rate is called the “chonsei to monthly rent conversion rate”. Although the chonsei to monthly rent conversion rate is much higher than the interest rate of savings accounts or mortgage loans, making chonsei a more expensive channel of financing, chonsei remains a dominant type of rent in Korea. This study provides a novel theoretical model in a continuous-time portfolio selection framework that allows a lessor, given borrowing constraints, to optimally choose between chonsei and monthly rent contracts to show a possible solution to this situation. We investigate the optimal choice between chonsei and the monthly rent of lessors using a rigorous theoretical model and find a closed-form solution to the model. We analyze how credit availability in the banking sector affects the choice problem, showing that the lessor may prefer the chonsei contract over the monthly rent contract, given the borrowing limit from a bank. In addition, we analyze the impact of other major factors, such as the market price of risk, the amount of chonsei deposit, the monthly rental rate, and the income rate, on the lessor’s optimal decision between chonsei and monthly rent.

Suggested Citation

  • Ahn, Seryoong & Ryu, Doojin, 2024. "Optimal chonsei to monthly rent conversion choice given borrowing constraints," The Quarterly Review of Economics and Finance, Elsevier, vol. 93(C), pages 28-42.
    • Handle: RePEc:eee:quaeco:v:93:y:2024:i:c:p:28-42
    DOI: 10.1016/j.qref.2023.11.005
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    More about this item

    Keywords

    Chonsei; Rent; Housing; Optimal stopping;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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