Spot-lite: Cracks appearing in China’s housing market

Sunday, 28th September 16:00 HKT

Given China’s economic heavy reliance on the property market, the recent stream of headlines on property price falls, are causing nervousness amongst many investors and banks. Yet a greater worry for the government is a collapse in the household property market, which could trigger wider discontent in society.

Xinhua reports on the recent trend of home buyers failing to make monthly repayments and reneging on their mortgages. As a result the local courts are having to handle more and more mortgage disputes between banks and borrowers. Areas most affected include Hangzhou, Ningde and Suzhou.

Data from the local Suzhou Industrial Park District show that from January to August this year, there were 120 cases of banks suing household borrowers for breaking their mortgage agreements. A year on year increase of 68.7%. Almost all cases share a worrying aspect in common, homeowners admitting an inability to keep up with monthly payments.

Take for example Mr. Wang’s case. He bought his second home in Suzhou in March 2012, at a time when local and national property prices were reaching new highs. The loan was for 800,000 yuan, with a term period of 20 years. Watching prices continue to rise, Mr. Wang hoped to sell the property a few years later and turn a small profit. But then the economy took a downward turn, causing a large fall in Mr. Wang’s wages and benefits. To make matters worse, due to the governments tighter macroeconomic controls, the prices of all his properties began to fall as well, losing 20% in value.

In the end, facing monthly payments of a few thousand yuan, Mr. Wang could no longer take the pressure, and decided to stop paying the bank. The banks efforts to encourage Mr. Wang to continue with the mortgage failed, leaving them with no option but to take him to court. The court ruled in the banks favour, and ordered Mr. Wang to repay all plus interest, and awarded the bank priority claim on Mr. Wang’s property.

A court judge who has handled many cases, said that most mortgage disputes involve mortgages were taken out after 2010, and are the second, third or even fourth property. He blames the herd mentality of buyers, all competing to buy houses for speculative purposes, and failing to take a long term view on the market.

Another criticism he adds, is that homebuyers failed to properly assess their personal finances, and whether or not they could repay their loans. Any slight mishaps and the homeowner is suddenly unable to keep up with repayments, leading to the embarrassing situation of seeing the property auctioned off at cheap prices. So he warns homeowners falling behind in payments gives banks the contractual right to call in the loan, and repossess the house. Also a record will be entered in the credit system, which will impact a homeowners personal credit rating.

An industry park insider said that many were failing to make payments as the property prices were falling short of the mortgage repayment values creating ‘negative equity’. Other reasons include a change in the homeowners business fortunes or property speculators fund raising channels were being severed. Thus continuing with that second or third home investment seems less worthwhile.

The government faces a catch-22 as it tries to prevent shadow banking and outright property speculation destabilising the economy, whilst avoiding a property market collapse. So far the approach appears to be let small investments default in an orderly fashion, whilst propping up large investments that pose systemic risk. Leading Chinese economists point out this is a result of the governments massive 4 trillion yuan stimulus package, post the 2008 financial crisis.

(Article not to be republished without permission or citation).

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