Tight property loans restrain China's housing market

Sluggish home sales, increasing market supply and declining property prices epitomize China's cooling real estate market. And there are worries that the decline may continue as banks become reluctant on mortgage lending.

In east China's Nanjing, for example, a postgraduate surnamed Li is interested in buying a four-bedroom apartment. Li is able to pay a 70-percent down payment, but still needs to apply for bank loans to complete the payment. So far, the application remains unapproved.

The case is not unusual, prompting the central bank to act last month, by urging the country's commercial banks to be quicker in approving and issuing loans to eligible home buyers, mainly first-time home buyers.

However, banks in different cities were not consistent in responding to the call. Chen Kaihe, an estate advisor at 5i5j.com, a leading Chinese real estate agent, said that most banks have accelerated their speed in granting loans, though the China Construction Bank in Shanghai was slower.

Most mortgage loans for first-time home buyers in Shanghai are charged at the benchmark rate, but in the adjacent city of Wuxi, certain banks are charging 10 percent more than the benchmark rate.

In China's smaller third and fourth-tier cities, the mortgage lending market has long been both bizarre and secretive, as home buyers may be coerced to accept financial products offered by the banks, such as wealth management and insurance, before they are offered mortgage loans.

Meanwhile, cash-strapped property developers in small cities have also been asked to fulfill requirements raised by the banks such as making deposits on fixed dates. Failing to do so may lead to down payment rises and lending delays, which will further slow developers from receiving sales money, according to Xu Jin, a credit lending expert at rong360.com, a financing information website.

Zhu Zhongyi, vice president of the China Real Estate Industry Associations, also said in a research note that the slowdown in mortgage lending and property development lending has exacerbated the general deceleration in the real estate market.

According to official data, sales of residential property slumped 7.7 percent during the first quarter of 2014 to 1.1 trillion yuan (about 176.6 billion U.S. dollars). Month to month, home prices have been falling in more of the 70-strong pool of major cities surveyed by the National Bureau of Statistics. Meanwhile, experts expect the cooling trend to continue.

RELUCTANT BANKS

China's commercial banks have been reluctant to lend to individual home buyers since the end of last year, leaving the central bank's latest guidance with perhaps limited power.

Li Yujia, an analyst from Shenzhen Real Estate Research Center, noted that commercial banks used to issue a large amount of credit in the heyday of real estate.

"Now the banks have to bear the downward risks of the property market. That's why they have taken the conservative track," Li said.

Individual housing loans used to be a quality source of business for banks, but the situation may have changed.

For banks, housing loans incur high management and labor costs, and are less attractive because profits are wearing thin, according to Li.

Mortgage house loans took about 30 percent of new bank loans last year,but the percentage is declining this year, added Zeng Gang, a researcher at the Financial Research Institute under the Chinese Academy of Social Sciences.

Meanwhile, under the influence of interest rate liberalization and financial innovation, banks are also losing cash deposits and have fewer sources of funds at their disposal, hence their rising reluctance to lend.

Experts believe banks are now quietly calibrating the balance of their business, after a decade of lucrative co-existence with the booming and then sizzling property market. In order to ease liquidity pressure, banks are resorting to inter-bank businesses and wealth management products.

RISKS

Tight credit also causes headaches among developers, especially smaller ones, as they see timely, low-cost cash flows as lifeblood.

They are usually not favored by banks in terms of development loans, and are also strained by fewer home loan issuances. Data has showed that down payments and mortgage loans could account for as much as 40 to 50 percent of developers' revenues on average.

According to a report on China's real estate market by Bank of America Merrill Lynch Global Research, a further slowdown is inevitable in China's real estate market and there will be a sharp rise in the number of small developers hit by financial troubles.

However, it ruled out a systemic crisis in the sector because it said that the real problem is misallocated supply due to the Hukou, or Chinese household registration system, and the rural land system, rather than overinvestment.

It noted that new urbanization, driven by reforms to land ownership and the Hukou system will help correct the distorted housing supply and demand in China.