Curbing property leverage risks should be top priority

By Li Qiaoyi Source:Global Times Published: 2016-3-10 0:38:01

Illustration: Peter C. Espina/GT

Over the past year, it has seemed that the country was either in a frenzy of stock trading, seen primarily in the first half of last year, or on a home-buying spree, as has been seen recently in first-tier cities and some second-tier cities.

There has been a lot of media coverage surrounding the growing variety of ways in which would-be homebuyers can come up with enough cash for a down payment, which has also led to concerns about greater use of leverage. The situation appears reminiscent of the surge in leverage in the stock market last year prior to the summer slump, and questions have been raised about whether a similar avalanche might soon hit the property market.

Huang Qifan, a deputy to the country's top legislature and mayor of Chongqing, the fastest-growing metropolis in the country, raised the issue this week. He told a panel discussion at the ongoing two sessions that if high levels of leverage are allowed to spread around the country, it could lead to a financial catastrophe, China Economic Times reported on Tuesday.

Huang said the property market should definitely avoid using leverage to boost transactions and reduce inventories of unsold homes. Lending money to people to cover their down payments could effectively help some buyers purchase houses with zero down payments, in an echo of the US subprime mortgage crisis, he warned.

Offering loans to help cover down payments is not a new phenomenon in the country, having previously mostly been offered by property developers in partnership with financial institutions, with a repayment period of no longer than three years.

However, there has been an increasing availability of such loans over the past year, and the repayment span has grown to as long as five years. Such loans have been offered by major domestic real estate brokerages including Homelink Real Estate Agency Co, Shenzhen WorldUnion Properties Consultancy Co and SouFun Holdings, fueling conjecture about how big a part this has played in the recent buying frenzy in some of China's biggest cities, particularly Shenzhen in South China's Guangdong Province.

New home prices in Shenzhen surged by 52.7 percent in January from the year before, according to data from the National Bureau of Statistics, with a rise of 21.4 percent in Shanghai, 11.3 percent in Beijing and 11 percent in Guangzhou.

The empirical evidence so far suggests that the increased use of leverage in the housing market is still modest compared to the upsurge in margin financing that helped drive the stock market bull run in the first half of 2015 and then made the subsequent slump even more painful.

But in a fresh sign of growing vigilance toward leverage in the property market, some brokerages such as Homelink and SouFun have stopped offering loans for down payments, according to media reports.

The wider availability of such loans, which appears to have gone unnoticed by the authorities until very recently, has apparently facilitated home purchases by those who might otherwise have been put off by the high prices, particularly in first-tier cities.

Some of these loans may well have gone to creditworthy homebuyers looking to buy a new property for their own use. But there are concerns that the loans might also have been used by speculators betting on continued rises in home prices, whose eagerness to invest in property could drive the already high prices up even further.

While some of the loans for down payments have been offered by banks with real estate agencies serving as the go-between, some of them have been offered directly by the real estate agents. The real estate agents offer Internet-based wealth management products to investors with much higher yields than bank savings, and then use the money accrued from that to be offered as loans for down payments. This consequently draws risk from the arena of online finance, which has yet to be effectively regulated.

Risks associated with increased leverage might not be obvious as long as home prices continue on an upward trend, but if they start to fall it could become a serious problem

The fundamental way to rebalance the property market is to have public services distributed more equally across the country and to enable more balanced growth between different regions.

But clearing the risk from property leverage out of the overall financial system should perhaps be a higher priority for local authorities in the short term.

The author is a reporter with the Global Times.

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