Typical jeonse tenants start with savings equal to 10-20% of the value of the property. (To buy an apartment, on the other hand, they would need a down payment of at least 30-40% due to LTV restrictions.) They borrow the rest of the deposit from a bank. The landlord takes that money and adds their own loan to buy more houses, invest in coins, or whatever. So everything is leveraged at least twice. Of course this scheme all crumbles down when interest rates go up and property values drop.
- It's the general norm that people stay with their families well into adulthood -- often even after marriage and children (with "free" childcare from the grandparents). It's not as common for single adults to have their own property. [1]
- Given this reality of households, families often pool their money for large purchases. Since Jeonse is "guaranteed" returned after a lease, it's low/no risk to individual family members, who all get a place to live as part of the agreement. It also lets people of a variety of economic circumstances all participate in getting high quality housing.
- The average wage in South Korea is <$3k per month (in USD), while housing in the Seoul Capital Area (about half of the population) is at or near NYC prices: or about $10k-$30k per square meter. Most individuals, and even families, thus cannot afford an entire mortgage on their own, but can afford to both pool money and to secure Jeonse loans (which have a lower interest rate than mortgages as the landlord is the guarantor) at lower overall values.
- Jeonse doesn't mean "lump sum for no rent", it's a sliding scale and many properties use Jeonse + some minimal rent. At the other end of the scale the typical Western style "deposit + full rent" is called a Wolse.
- Crashing at a flop house/share house/whatever does happen, there's an entire industry of ultra-minimal cheap apartments, but both social stigmas and once a person gets married and has kids, you need more space quickly.
It's not a perfect system, but during a fast growing economy coupled with a government strapped for cash, it allowed tens of millions of Koreans to move into safe and modern housing. Unfortunately, it's extremely fragile in any other conditions and has lots of downsides in nearly any other market condition. As the Korean state matures and growth slows, I expect it to slowly go away to be honest.
1 - With the exception of Officetels, which are tiny efficiencies meant for working professionals.