Korean houses on bubbles, market trend graph in background.

Decoding the Korean Real Estate Puzzle: Can a Unique System Prevent Bubbles?

Beau Callahan in Business & Economy August 2025 • 4 min read.

"A real options framework offers new insights into managing market stability using Korea's Jeonse system."

The global financial crisis of 2007-2009 served as a stark reminder of the devastating consequences of unchecked real estate bubbles. The crisis, originating from the collapse of the U.S. sub-prime mortgage market, triggered a worldwide economic downturn, emphasizing the critical need for effective mechanisms to identify and manage these bubbles before they burst.

In response to this challenge, researchers have increasingly focused on understanding the dynamics of real estate markets, particularly in countries experiencing rapid economic growth. These markets are often susceptible to speculative bubbles that can destabilize the entire economy. Korea, with its unique housing finance system and history of economic fluctuations, presents a compelling case study.

This article delves into a groundbreaking study that proposes a novel approach to managing real estate bubbles in Korea. By integrating the nation’s distinctive 'Jeonse' deposit system within a 'real options' framework, the research offers a new lens through which to view market stability and risk management. This framework not only provides a tool for measuring and understanding bubbles but also suggests strategies for mitigating their potential impact.

What is the Jeonse System and How Can It Help?

Korean houses on bubbles, market trend graph in background.

The Jeonse system is a unique feature of the Korean housing market. It involves a tenant providing a landlord with a large lump-sum deposit for the duration of their lease, typically one to two years. This deposit acts as a substitute for monthly rent, and is fully returned to the tenant at the end of the lease period. The system offers tenants a stable housing arrangement and landlords access to a significant capital sum for investment.

Researchers have long debated whether Jeonse contributes to or protects from financial risk. Some believe it exacerbates bubbles by allowing greater access to capital, while others suggest it stabilizes the market by reducing reliance on debt. This new study positions that Jeonse can act as a vital price indicator, reflecting the actual current value of a house more accurately than the overall price, which can be skewed by speculation.

Jeonse as a Zero-Coupon Bond: The study draws an analogy between a Jeonse contract and a zero-coupon bond secured by collateral.
Tenant as Option Holder: The tenant is viewed as holding a 'call option,' giving them the right to benefit from any increase in property value during the lease.
Landlord as Option Writer: Conversely, the landlord effectively holds a 'put option,' bearing the risk if the property value declines.
Early Exercise Flexibility: The system's allowance for early termination of contracts mirrors the 'American option' model, permitting adjustments based on market conditions.

By understanding these dynamics, the real options framework aims to provide market participants with better information, enabling more rational investment decisions and ultimately contributing to market stability.

Towards a More Stable Housing Market

This research provides a valuable framework for understanding and managing real estate bubbles, not only in Korea but potentially in other markets as well. By integrating unique local financial systems into a real options model, policymakers and investors alike can gain deeper insights into market dynamics and work towards creating more stable and sustainable housing markets.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.3390/su10082875, Alternate LINK

Title: Managing Bubbles In The Korean Real Estate Market: A Real Options Framework

Subject: Management, Monitoring, Policy and Law

Journal: Sustainability

Publisher: MDPI AG

Authors: Kyungwon Kim, Jae Song

Published: 2018-08-13

Everything You Need To Know

What is the 'Jeonse' system, and how might it help in preventing or managing real estate bubbles?

The 'Jeonse' system in Korea is a unique housing arrangement where a tenant provides a lump-sum deposit to the landlord instead of paying monthly rent. This deposit is fully returned at the end of the lease term, typically one to two years. It can potentially help manage real estate bubbles by acting as a vital price indicator, reflecting the actual current value of a house more accurately than the overall price, which can be skewed by speculation. This system gives tenants stable housing and landlords capital for investment. However, whether it exacerbates or protects from financial risk is still under debate.

How does the 'real options' framework analyze the roles of tenants and landlords within the 'Jeonse' system?

The 'real options' framework views the 'Jeonse' contract through the lens of financial options. Specifically, the tenant is seen as holding a 'call option', allowing them to benefit from property value increases during the lease. Conversely, the landlord is viewed as holding a 'put option', bearing the risk if the property value decreases. This approach allows for a more nuanced understanding of the risks and opportunities inherent in the 'Jeonse' system, particularly in the context of fluctuating real estate markets.

What is meant by 'early exercise flexibility' in the context of the 'Jeonse' system and how does it relate to the 'American option' model?

The framework incorporates the concept of 'early exercise flexibility' by drawing a parallel between the 'Jeonse' system's allowance for early termination of contracts and the 'American option' model. This flexibility allows both tenants and landlords to adjust their positions based on evolving market conditions. If the market is declining, tenants might want to end the contract, while landlords would want to end the contract if the market increases, mirroring the dynamics of exercising an American option before its expiration date.

How can integrating the 'Jeonse' system into a 'real options' framework lead to a more stable housing market?

By integrating the 'Jeonse' system into a 'real options' framework, market participants can gain access to better information, which can lead to more rational investment decisions. This approach offers a tool for measuring and understanding bubbles and also suggests strategies for mitigating their potential impact. This framework not only helps in understanding market dynamics but also contributes to overall market stability. For example, it can enable more accurate pricing of housing assets and better risk management strategies for both tenants and landlords.

In the study, how is the 'Jeonse' contract compared to a financial instrument like a 'zero-coupon bond', and what does this reveal about the system?

The study draws an analogy between a 'Jeonse' contract and a 'zero-coupon bond' secured by collateral, meaning the deposit serves as the principal amount that is repaid at the end of the term without periodic interest payments. This comparison provides a financial perspective on the 'Jeonse' system, highlighting its role as a form of secured lending within the housing market. This reinforces the idea that 'Jeonse' functions not just as a rental agreement but also as a financial instrument, impacting capital flows and investment decisions.