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Credit Constraint and Excess Return: The Case of Chonsei Leases in Korea

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  • Sam-Ho Lee

    (Korea University)

Abstract

Chonsei lease arrangements, in which an up-front deposit is paid at the start and returned at the end of a lease without any periodic payments, are a unique and dominant form of lease in Korea. This paper offers a simple model to explain the existence of the chonsei lease arrangement. The chonsei deposit can be thought of as a loan from the tenant to the landlord, and interest is paid in the form of housing consumption. From this perspective, a chonsei deposit is cheap because the calculated interest rate is higher than the market rate. The landlord should have a good investment opportunity to justify the use of chonsei. However, it is widely understood that chonsei deposits are used mostly as leverage to purchase a house. With credit constraints, this paper suggests excess return can exist in the housing market and that the chonsei lease arrangement is utilized to capture this return. The current demand for housing can be restricted by credit constraints and house prices can be undervalued. A credit-constrained agent may resort to chonsei to fund the purchase of a house. In contrast, the tenant will ask for high-interest payments.

Suggested Citation

  • Sam-Ho Lee, 2021. "Credit Constraint and Excess Return: The Case of Chonsei Leases in Korea," Korean Economic Review, Korean Economic Association, vol. 37, pages 157-197.
    • Handle: RePEc:kea:keappr:ker-20210101-37-1-07
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    File URL: http://keapaper.kea.ne.kr/RePEc/kea/keappr/KER-20210101-37-1-07.pdf
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    References listed on IDEAS

    as
    1. Bengt Holmström & Jean Tirole, 2001. "LAPM: A Liquidity‐Based Asset Pricing Model," Journal of Finance, American Finance Association, vol. 56(5), pages 1837-1867, October.
    2. Dongchul Cho, 2005. "Interest Rate, Inflation, and Housing Price: With an Emphasis on Chonsei Price in Korea," NBER Working Papers 11054, National Bureau of Economic Research, Inc.
    3. Kim, Jinwon, 2013. "Financial repression and housing investment: An analysis of the Korean chonsei," Journal of Housing Economics, Elsevier, vol. 22(4), pages 338-358.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Credit Constraint; Chonsei Lease; Housing Market;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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