Housing Valued Beyond Consumption Value: Evidence from the Korean Jeonse System

The objective of this paper is to identify the main sources of housing values beyond their consumption value, which reflects the current state of housing attributes. Leveraging Korea’s unique rental system, jeonse—where tenants pay a lump-sum deposit that is fully returned at the end of the contract—we isolate the component of housing prices that exceeds consumption value. We construct the price-to-jeonse ratio at a granular, property-level scale using repeated transactions and rental contracts for effectively identical units, and estimate its relationship with housing and neighborhood attributes. Our results show strong explanatory power from variables capturing redevelopment potential, such as building age and the capital-to-land ratio. Taken together, these variables explain more than half of the variation in housing prices beyond their consumption value. Furthermore, variance decomposition analysis indicates that over 80% of the variation in housing prices is explained by variation in consumption value measured by jeonse deposit. These findings suggest that, in Seoul, speculation plays only a limited role in explaining cross-sectional variation in housing prices.