Effects of Jeonse loan usage on renters’ housing consumption: A control function approach

This study examines the effect of Jeonse loans on housing floor area consumption among renter households in South Korea. To address potential simultaneity between Jeonse loan utilization and housing area choice, this study employs a two-stage estimation framework in which permanent income is first estimated, and a control function approach is subsequently applied. Using microdata from the 2024 Korean Housing Survey, the analysis distinguishes between Jeonse and deposit-based monthly rent households. The results indicate that simple ordinary least squares estimates tend to overstate the effect of loans on housing floor area. After including the control function, the estimated impact of Jeonse loans on housing area for Jeonse households becomes small and statistically insignificant. Thus, within the Jeonse market, the primary role of Jeonse loans is facilitating market entry and contract maintenance rather than improving housing quality through increased living space. In contrast, for deposit-based monthly rent households, a positive association between loans and housing floor area is observed. This difference likely reflects the contractual flexibility of deposit-based monthly rent arrangements, which allow households to adjust the balance between deposits and monthly payments. Therefore, loan-financed increases in deposits can reduce monthly rent burdens, ease cash-flow constraints, and, for some households, enable greater housing consumption.