The US subprime boom that eventually would trigger the 2008 global financial crisis started when lenders pushed outsized home loans on people with no wherewithal to spend them back. These 房屋貸款 were often so cash-strapped which they made tiny down payments on their own properties. When home values fell and loans went bad, banks and investors holding the loans, and financial investments build off them needed to eat massive losses.
One corner of China’s property industry is beginning to look very similar. That’s because Chinese home buyers are borrowing huge levels of money to pay for down payments with the country’s hard-to-track shadow banking system. While international investors have not jumped straight into buy these loans because they did in the US, a housing price downturn could slash China’s banks’ profits, as well as the net worth of millions of Chinese.
Normally, to get a mortgage in China, homebuyers need to put down at least 20% of a home’s value, and more in certain big cities. But in recent years, these new players have stepped in, so that it is easy for someone without savings in any way to get a mortgage loan. It is easy for someone without any savings whatsoever to take out a mortgage loan in China. Property developers, real estate agencies, and internet peer-to-peer lenders are active in this highly leveraged market, plus they sell the loans as wealth-management products, to millions of individual investors in China.
China’s top leadership is worried. Chongqing mayor Huang Qifan, who may be rumored to be premier Li Keqiang’s new top economic adviser, revealed parallels between China’s situation and the US subprime crisis throughout the Communist Party’s annual planning meetings earlier this month. “If China allows high leverage from the real estate market, it can lead to a financial disaster,” Huang said.
Speaking around the sidelines of Beijing’s annual political meetings earlier this month, Chinese central bank governor Zhou Xiaochuan said borrowing money to protect home down payments are not allowed. Vice governor Pan Gongsheng said regulators are cracking upon developers, agencies, and P2P lenders-but the problem has grown to a lot of huge amounts of dollars.
Even while China’s economic growth has slowed, outstanding mortgage loans have continued to develop. Chinese bank-issued home loans rose to 14 trillion yuan ($2.2 trillion) in 2015, 6% faster compared to the previous year, according to the Chinese central bank (link in Chinese).
In first-tier cities, homes have rarely been a bad investment, especially as compared to the volatile stock exchange. When China’s stock market tanked in mid-July 2015, investors started to ditch stocks for property. Home prices in first-tier cities including Shanghai, Shenzhen, Beijing and Guangzhou happen to be rising ever since then. The finance ministry reported property sales tax in January and February rose 20% (link in Chinese) vs. the previous year.
And China’s banks are increasingly being encouraged to lend more. On March 1, the bank required reserve ratio was cut .5%, releasing an estimated $105 billion into the financial system. In reaction, Chinese banks have reportedly (link in Chinese) shortened the period it takes to approve new home mortgages and lowered rates of interest. The down-payment ratio was lowered in September 2015 the very first time in 5 years, after it had been hiked to deflate a home bubble.
China desperately needs the housing industry to increase to prop up its slowing economy. China needs the real estate market like a backbone to prop up its slowing economy, and central and local governments have introduced new incentives to fill empty homes in lower tier cities. The country’s 270 million migrant staff is being pushed to part of and get homes to keep the economy strong.
Banks check borrowers’ salaries, assets, education, and credit score to determine who to lend to, but as the mortgage market has a much shorter history in China when compared to developed countries, predicting where the risks could be difficult. And, as the US proved, lenders can certainly make serious mistakes even during a mortgage loan market using a long history.
China’s online “peer to peer” lenders, who raise money from consumers and lend it with other consumers while going for a cut that belongs to them, made 924 million yuan ($142 million) in down-payment loans in January, over 3 times the total amount made last July, in accordance with Shanghai-based P2P consulting firm Yingcan Group. The company is under a year-old, but already the complete level of P2P loans designed for home down payments stands at 5 billion yuan, Yingcan estimated. (October and February were weaker months because of holidays.)
Yingcan tracks down the P2P loans recognized as for home purchases in the websites of the some 2,000 Chinese P2P lenders. The real figure could possibly be better, because loans for things such as “interior decoration” or “daily spending,” may also used for down payments, Yu Baicheng, vice managing director at Yingcan, told Quartz.
By March 17, all 20 P2P lenders that offered loans for home down payments had halted the service, responding to some government investigation, Yu said. But it’s impossible to inform whether loans they’re making for other reasons are inclined toward down payments.
A lot of those P2P lenders will also be realtors, so they’re incentivized to produce loans to market homes. Many P2P lenders can also be real estate agents, so they’re keen to make advance payment loans.
Beijing-based agency Lianjia, for example, lent out 13.8 billion yuan through P2P products in 2015, including 300 million yuan for home down payments, company head Zuo Hui told China Business News (link in Chinese) this month. Lianjia has stopped making home down-payment loans, however it still offers loans according to a home’s equity for other purposes, including home decoration, car purchases, and business operations, as outlined by its website.
P2P loans typically mature in three to six months, and mask to half of the down payment on the home, at the monthly rate of interest of .6% to 2%, Yu said. Second-time home buyers are able to use their first homes as collateral for home loans, while new homebuyers get practically unsecured loans. Investors who put their money into products linked to these P2P loans usually receive an annual return of 8% to 10% , and also the platforms pocket the visible difference, he was quoted saying.
Another worrying trend may be the zero down-payment home purchase. In some cases, property developers will handle 100% of a payment in advance, without having collateral, for a home buyer who promises to repay the financing each year. Occasionally, property developers will cover 100% of an advance payment. Annual interest rates are steep-15% typically, Yan Yuejin, research director at Shanghai’s E-house China R&D Institute, which analyzes China’s housing industry, told Quartz.
Yan said the phenomenon is particularly dangerous since these buyers often are speculators. They inflate housing prices, and quite often bypass restrictions and taxes on buying more than one home, sometimes by faking a divorce or signing an underground contract with developers employing a different name, Yan said.
A Shanghai-based real estate agent, who asked to never be named, told Quartz her brokerage saw a boost in home buyers lending for down payments by 5 times considering that the end of 2015. This month, one third of her clients have requested down-payment loans.
They’re speculators, who “buy new homes before selling the existing ones” amid an amount surge, she said. Housing prices from the southeastern suburb of Shanghai, where her company is located, jumped 30% ever since the end of 2015. Such loans cover from 30% to 100% of their down payments, with an monthly interest of 1.1% to 1.3% and also the old home as collateral, she said.
“Most are going to pay way back in 2 or 3 months,” she said, once they sold off their original property. The company doesn’t offer the financing service upfront, but they are happy to when clients ask, as it is in the legal “grey area” she said. “Otherwise they will consider small creditors,” for that financing, she said.
Verifiable nationwide statistics are hard to come by, but judging from specific city-wide figures and market experts’ experience, low- and no-down-payment mortgages are dexrpky31 significant slice of the marketplace.
Yan estimated 5% of Chinese home buyers have borrowed money to produce home down payments-which doesn’t count “zero down payment” loans from developers.In Shanghai alone, no less than 10 new properties, or nearly 10% of the total each month, offer zero-down payments, Yan said.
An incomplete report on March 9 from your 房貸 shows 30 local business owners-including P2P lenders and lending firms-hold outstanding loans for home down payments of 2.5 to 3 billion yuan (link in Chinese). New home prices in Shenzhen surged 58% in March from last year.
In the crucial difference between the usa market, these zero-down-payment loans have not been turned into securities, E-house’s Yan said. Still, he was quoted saying, “the risks will end up more obvious because the home values keep rising.”
In case the US’s experience is any guide, a housing boom fueled by easy lending and low-down-payment loans can be a shaky proposition. China’s lenders and investors may find themselves by using a genuine subprime crisis, with Chinese characteristics.