Monthly rent with variable deposit A new form of rental contract in Korea

Abstract

In this paper we describe the structure of the monthly-rent-with-variable-deposit (MRVD) contract a distinct type of rental contract in Korea We demonstrate that the Chonsei contract is one variant of the MRVD contract To explain the MRVD contract we propose a leverage-effect seeking hypothesis Based on this hypothesis we are able to elucidate a variety of rental market conditions in Korea Our hypothesis is consistent with the simultaneous existence of several types of rental contracts and various combinations of monthly rent as well as the up-front deposit in the MRVD contracts We also focused on the deposit-to-monthly-rent conversion rate a critical factor in the Korean rental housing market Our hypothesis indicates that conversion rates vary across local markets depending on local market conditions such as the expected house price appreciation rate The results of our data analysis demonstrate that our hypothesis more adequately explains the observed trend in the conversion rate as well as that in the MRVD contracts.