The Price Impact of Deposit in Residential Lease Contracts: The Collapse of Chonsei System in Korea

Abstract

We analyze the effects of a lump sum deposit of a lease contract on residential property returns. According to our pricing model, property returns increase with the deposit to price ratio when interest rate is larger than dwelling benefits. When interest rate becomes lower than the dwelling benefits, on the contrary, property returns decrease as the deposit to price ratio increases because dwelling benefits exceed interest revenues earned from the deposit. Therefore, a lower interest rate makes landlords prefer residing in the properties to renting out them, causing a decrease in supply in the housing lease market. These results indicate that when low interest rate continues, the deposit based lease system such as antichresis lease would disappear. Our empirical results using “Chonsei”, a popular lease contract without monthly rental payment in Korea, support this view. The positive relationship between property returns and Chonsei-to-Price ratio is no longer significant after the financial crisis in 2007, and the recent decrease in interest rate is the main contributor that reduces the effect of Chonsei-to-Price ratio on property returns.

Keywords: Property pricing model, Deposit to price ratio, Antichresis lease, Chonsei

JEL Classification: G12, R31