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In China, Steps to Ease Mortgages as Real Estate Loses Its Sizzle
SHENZHEN, China — China's real estate bubble has lost its fizz in many cities, complicating the government's effort to manage an economic slowdown here.
The pain is obvious in Liu Shirong's apartment development. Mr. Liu, a shy electrical engineer, doesn't mind living in a complex where only 50 of 780 apartments are occupied and the swimming pool is eternally empty. "I have peace and quiet at night," he said.
But the vacant apartments are a nightmare for the mainly speculative investors who bought them a year ago. And nearby, only one of the two dozen towering cranes was still in operation on a recent afternoon.
Banking experts and economists expect this to produce a surge in loan defaults for Chinese banks by next spring or summer that will erode the high profits banks have been earning in the last three years although few banks seem likely to fail. But the effects of the bust could extend far beyond banking, complicating economic policy-making.
For that reason, the Chinese government announced a series of measures late Wednesday night to support real estate prices. The central bank told commercial banks to reduce mortgage rates and down payments for borrowers seeking their first mortgage. The finance ministry also reduced the stamp tax on real estate purchases, effective Nov. 1, but only for first-time home buyers acquiring an apartment of less than 90 square meters, or 969 square feet.
Real estate professionals and economists said the measures were too narrow to reverse growing gloom in China's housing market. Prices have already fallen by up to a third in some neighborhoods here in Shenzhen in southeastern China, the city most affected by the real estate bust.
A national index of real estate prices released by Beijing on Wednesday showed a decline of 0.1 percent in September compared with August, the first such drop the government has acknowledged. But experts inside and outside China say that actual declines have been much greater.
The new rules leave in place China's many punitive policies on people who buy real estate as an investment.
"Things are still getting worse," said a top executive at a real estate developer with a variety of projects. The executive insisted on anonymity, citing the government's sensitivity about the housing market.
China's central bank had come under intense pressure to lower interest rates and ease restrictions on bank lending to developers. But a quick or broad relaxation of monetary policy could reignite inflation, which surged to 8.7 percent at the consumer level in February but has since receded to 4.6 percent last month.
"Real estate developers are threatening the People's Bank of China, saying, 'If we die, the banks die first,' " said Yu Yongding, a former member of the central bank's monetary policy committee and now an adviser to China's cabinet. "If the government bows to this kind of pressure, we lose all the benefits of what we did before" to reign in inflation.
Paradoxically, the relative lack of sophistication of China's mortgage system could keep its real estate bubble from expanding into a credit and financial crisis like the one that engulfed the West — though Western bankers had been trying for years to get the Chinese to bundle them and sell them as securities, one of the roots of the financial crisis.
"The chances of a systemic financial crisis in China in this cycle are extremely, extremely low," said Arthur Kroeber, the managing director of Dragonomics Research, a consulting firm in Beijing.
Though China's banking system has many problems, including rampant political influence and fraud in corporate lending decisions, mortgage lending is still more tightly regulated than in the West. The mortgage market remains closer to something out of the 1946 Frank Capra movie "It's a Wonderful Life" than to the home loans with no down payments and practically no credit checks that proliferated in the United States.
Roughly half of Chinese home buyers still pay cash for their homes and do not take a mortgage at all. For those who do need mortgages, the down payment is 30 percent for first-time buyers and 40 percent or more for buyers who have a mortgage on another home; under the measures announced Wednesday, the down payment will fall to 20 percent for buyers obtaining their first mortgage. But some cities like Shenzhen have already done this on their own with limited effect.
One Chinese regulation would never be allowed in the United States but is widely accepted here as simple prudence: the term of a mortgage must end when the borrower turns 55, for a woman, or 60 for a man. So a 52-year-old man can take only an eight-year mortgage, and 52-year-old woman a three-year mortgage.
Short durations for mortgages mean that homeowners quickly build up equity in their homes with their monthly payments. That makes them reluctant to mail the keys to the bank and walk away if the market weakens, although a few speculators have done so.
It is also nearly impossible for Chinese banks to foreclose on homes. So banks tend to renegotiate monthly payments for borrowers who can clearly demonstrate financial strain.
Chinese banks hold the mortgages they issue instead of following the American practice of bundling them as securities and selling off pieces to various investors. That process, known as securitization, is now making it hard for American homeowners to renegotiate their mortgages.
American bankers and lawyers unsuccessfully urged China for years to allow securitization, but have curbed these pleas in recent months after seeing the global financial crisis unfold.
"That's one area where I've always been very critical of Chinese government policy, but now it's not looking so bad," said Joel Rothstein, real estate specialist in the Beijing office of the Paul Hastings law firm. Tao Wang, an economist for UBS in Beijing, calculates that for the typical mortgage at publicly traded banks in China, the principal still owed to the bank is about half the original purchase price of the house. Most big banks in China are publicly traded, but the government owns a large majority of the shares.
With the real estate bust, analysts say some small and medium-size banks with greater exposure to the sector could face difficulties, but large banks, which have been forced by regulators to limit real estate loans since 2004, are expected to be somewhat profitable over all.
Leo Wah, the China banking analyst at Moody's, has not yet downgraded banks in China but is watching the weakness in real estate and related industries.
"We do not believe that it would cause a serious problem, but if property prices fall some more, it won't be the only sector that has problems," he said.
Already, construction is slowing. That is starting to hurt other industries — domestic steel consumption has suddenly dropped, and steel makers are rapidly stepping up exports to the United States despite the risk of fanning trade tensions.
For their part, Western banks and real estate funds have made only limited loans and other investments in Chinese real estate because of the government's restrictions on flows of money into the country. But these Western investors have begun hiring lawyers in some cases to serve notices of default to Chinese partners who have fallen behind on payments, said Mr. Rothstein.
"Until six or eight months ago, we really didn't have this for the China deals," he said.
Chinese banks themselves are flush with cash, with capital equal to 12 to 14 percent of assets, compared with the international regulatory standard of 8 percent.
More important, China has a heavily regulated market that guarantees banks some of the world's widest margins. Banks raise most of their money through short-term household deposits on which they pay an interest rate of just 0.7 percent. They lend at rates of 6 percent or more.
American regulators were reluctant to prick the real estate bubble that developed in the United States until last year. But starting in 2004, Beijing officials tried to limit real estate speculation through administrative measures like setting quotas for how much real estate lending could be done by each bank.
In August 2007, bank regulators began requiring larger down payments for second and third homes, and banks began charging interest rates up to 3 percentage points higher for those home loans than for first-time home buyers.
