Low down payments raise specter of U.S. subprime crisis
If China ignores the rising amount of leverage in the housing market it could lead to a financial disaster, according to Huang Qifan, mayor of Southwest China's Chongqing, media reports said Tuesday. [Special coverage]
As well as financial risks, the overheated housing market in first-tier cities such Beijing and Shanghai and measures by some local governments to increase financial leverage in order to reduce inventories of unsold housing have created a dilemma for the central government, experts noted.
"Increasing financial leverage for destocking is against the spirit of central government policy and will bring huge risks for the economy," Huang said during a panel discussion by the Chongqing delegation to this year's annual session of the National People's Congress, the website of China Economic Times reported.
Huang pointed out that banks have already lowered down payments for housing purchases and real estate developers and realtors are now offering loans to help people cover the down payments, bringing the actual down payment to between 5 and 10 percent and even as low as zero in some cases.
"And zero down payments were the origin of the U.S. subprime crisis," he noted.
Deleveraging and destocking are both high on the government agenda this year. But in order to tackle serious property oversupply, some cities, particularly second- and third-tier cities, have "definitely" been using financial leverage to boost house sales, said Tian Yun, director of the Research Center of the China Society of Macroeconomics.
There have been examples of this in Shenyang, capital of Northeast China's Liaoning Province and in Shanghai, Tian told the Global Times on Tuesday.
Media reports suggested last week that the Shenyang authorities were taking measures including offering zero down payments and loosening qualification requirements to encourage students to buy homes in the city. Although officials denied that such measures were in place and said they were still under discussion, the news sparked debate about how local governments can reduce oversupply without resorting on financial leverage.
In Shanghai, leading realtor Beijing Lianjia Real Estate Agent Co has halted its financial services for housing purchases after being investigated by local authorities, according to media reports last week.
Lianjia's financial services including loans might encourage "unqualified" people to buy houses, which could pose risks to the financial system, Xinhua reported on Monday, citing an anonymous source.
Lianjia's case is symbolic of Shanghai's overheated housing market, the Xinhua report said.
Rising market, rising risks
The housing market in first-tier cities such as Beijing and Shanghai has been heating up rapidly since the beginning of the year. In Shanghai, sales of secondhand homes rose 137.81 percent in January from a year earlier, according to a report from Lianjia.
Meanwhile, the price-to-rent ratio has continued to rise in recent years in China's first-tier cities, a research note by analysts at brokerage Haitong Securities said on Tuesday. A house buyer in Shenzhen would now have to rent out their home for nearly 60 years to get back the investment, the note said.
This has led to concerns that a bubble is growing in the housing market, posing serious risks for the already slowing economy and for the financial market, said Hui Jianqiang, research director with real estate information provider Beijing Zhongfangyanxie Technology Service.
"Financial leverage has definitely boosted the housing market," Hui told the Global Times Tuesday.
"But we can't ignore the risk of the bubble bursting," he said, adding that the government should find ways to reduce housing oversupply without increasing risks.
Local governments face a dilemma in choosing between destocking and deleveraging, and some local government officials might be more interested in boosting GDP than containing risks, Hui noted.
This dilemma reflects the lack of clear accountability at different levels of governments and of effective ways to track the progress of implementing the central government's reform plans at the local level, Tian said.
"The central government has a sound plan to focus on cutting overcapacity and deleveraging. That's doable but the question is how that plan will be implemented by local officials," Tian said, adding that a specific system needs to be put in place to ensure policies are carried forward and to hold officials accountable if there is any wrongdoing.
