China Plays With More Fire - No Money Down Mortgages
China bulls point out that that home prices in China are based on
fundamentals and 30% down payments are proof there is no real
estate bubble.
In reality, much of those "cash" down payments are borrowed in
various ways in China's shadow banking system, now estimated at $7
trillion.
Bloomberg reports China No-Money-Down Housing Echoes U.S. Subprime
Loan Risks
China’s home buyers are being offered no-money-down purchases
in an echo of the subprime lending that triggered a U.S. economic
meltdown and the global financial crisis.
Deals skirting government requirements for minimum 30 percent
down payments have emerged this year from Guangzhou and Shenzhen
in the south to Beijing in the north as real-estate sales slump,
according to state media and statements by government agencies and
developers.
“The risk is severe for developers and third parties because
there is no commitment from home buyers,” said Ding Shuang, senior
China economist at Citigroup Inc in Hong Kong. “Zero down payment
has appeared in the U.S. before. It basically enabled unqualified
people to buy houses,” said Ding, who used to work for the
International Monetary Fund.
“We need to see whether this will become widespread,” Ding
said. “For now, it seems still sporadic.”
Sales Sliding
The practice threatens to add to the build-up of risks in
China’s $7 trillion shadow banking industry, with developers or
third parties arranging funding to cover down-payment
requirements, according to Shen Jianguang, Hong Kong-based chief
Asia economist at Mizuho Securities Asia Ltd.
China’s home sales slid 10.2 percent by value in the first
five months of this year, the statistics bureau said today. The
Shanghai Stock Exchange Property Index rose 0.3 percent as of 2:09
p.m. local time, paring this year’s decline to about 4 percent.
In Guangzhou, in the southern province of Guangdong, nearly 20
housing developments rolled out no-down-payment plans to boost
sales, Nanfang Daily, Guangdong’s official Communist Party
newspaper, reported in April, as government agencies in Guangzhou
and Shenzhen issued warnings against the practice.
“‘Zero down payment’ can’t solve home buyers’ problems of
shortages of funds, and it has to rely on unconventional practices
such as paying the down payment for the customer at high interest,
or fraudulently inflating the property price to swindle banks out
of loans,” the Urban Planning Land and Resources Commission of
Shenzhen Municipality said in an April 10 statement.
Shadow Banking
Credit data released yesterday showed the government reining
in shadow banking while allowing higher bank lending to support a
faltering economy. New yuan loans exceeded forecasts at 870.8
billion yuan ($140 billion) for May.
Poly Real Estate Group Co. is letting buyers delay full down
payments at its Central Park development in southeastern Nanjing
city, the official China News Service reported June 6. Buyers can
pay deposits of 50,000 yuan and then 15 percent of the home price
in three months’ time. The smallest unit is about 70 square meters
and costs about 1.2 million yuan, the report said.
Widespread
“We need to see whether this will become widespread,” Ding said.
I propose it already has, that cash down payments are borrowed
from friends and families, and besides, China's property bubble is
headed for a bigger collapse than 30%.
The price of these homes is insane compared to income levels. In
that regard, the China bubble is far bigger than the US property
bubble.