How Does a Financial Contract Exposed to Credit Risk Constrain the Price Dynamics of Another?: A Case of Chonsei in Korean Housing Market

Chonsei is a very interesting way of trading residential services. Different from wolse (monthly rent), it exposes a tenant to the credit risk of a landlord. It also differs from owning a residential place in that the tenant could be partially protected from the housing price fluctuations ignoring the credit risks of the landlord. This paper examines how the credit risks of the landlords in the chonsei market influence the dynamics of housing price. It attributes the observations that chonsei deposit has been lower than housing price constantly to the credit risks of the landlords using a simple model. Then, accepting such a pecking order between chonsei deposit and sales price, the paper deduces that the housing price becomes a submartingale. The properties of a submartingale predict that the housing price would grow faster than it falls. Thus, an economy with the chonsei system is less likely to experience abrupt housing price falls as long as the system sustains.