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Modeling the Korean Chonsei Lease Contract
Author(s) -
Ambrose Brent W.,
Kim Sunwoong
Publication year - 2003
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1080-8620.2003.00057.x
Subject(s) - lease , escrow , landlord , context (archaeology) , economics , popularity , principal (computer security) , contract management , payment , business , value (mathematics) , finance , actuarial science , microeconomics , law , paleontology , management , machine learning , political science , computer science , biology , operating system
Chonsei is a unique Korean lease contract in which the tenant pays an up–front deposit, typically about 40 to 80% of the value of the property, with no requirement for periodic rent payments. At the contract maturation, the landlord then returns the nominal value of the deposit. Since there is no legal obligation on the part of the landlord to deposit the money in an escrow account, the principal default risk associated with the chonsei contract falls on the tenant. We discuss the development and popularity of this contractual agreement in the context of the public policy initiatives, historical and institutional settings surrounding the Korean housing and housing finance market. We develop a contingent–claims model that recognizes the compound options embedded in the chonsei contract. Theoretical predictions are confirmed by an empirical analysis using monthly data from 1986 to 2000. Our analysis shows that the chonsei contract is an indigenous market response to economic conditions prevalent in Korea.