Business

Dropping home prices put many in a panic

(China Daily)
Updated: 2010-09-02 17:52

BEIJING - Some housing investors are getting anxious about falling home prices in cities such as Beijing as government measures taken to cool the market start to bite.

Ren Shufeng, who works in a Beijing cosmetic company, said she bought a flat in April for 3.3 million yuan ($485,000).

"Now, just four months later, the price has shrunk by more than 600,000 yuan. It looks like the price will continue to fall," she said.

Ren, 40, bought the 120 square meter flat in eastern Beijing, taking a 15-year loan with a down payment of 1 million yuan.

"But I had entered the market when the price had peaked. I am afraid housing prices will fall even more sharply, to the extent that my property becomes a negative equity," she said.

Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance.

Ren said the flat is being rented and that helps pay for the mortgage.

Huang Hao, who works in the financial sector, bought a 105 sq m flat in southeast Beijing in March last year for 3.15 million yuan as an investment, signing a 10-year mortgage loan after paying a 945,000 yuan deposit.

However, with his business in difficulties, he has found it difficult to pay for the 18,375 yuan monthly installment.

"I may end up surrendering the flat to the bank if I cannot pay the mortgage for six months," he said. In such a case, the bank would auction the flat to recover their loan and return any balance to the owner.

The 21st Century Business Herald newspaper reported that Chinese banks are pondering the "extreme situations" when falls in prices cause negative equity to homeowners who then default on loans.

The report said banks feel borrowers for second or third homes are more likely to default than those who take loans to buy their first home.

Earlier this year, the government introduced strict policies, which requires 50 percent down payments on second homes.

However, an executive from a State commercial bank, Li Shulin, told China Daily that those who buy second or third homes "are wealthier to some extent".

"We are optimistic that negative equity will not occur since it is not possible that prices will fall by more than 50 percent," he said.

Some market analysts have different views.

She Minhua, a banking analyst at Haitong Securities in Shanghai, said although mortgages held by banks "don't have negative equity at present, it is possible that with the new policies biting, some mortgages will become 'negative assets'."

"Since the introduction of the tougher policies, property prices in major cities have not significantly declined and in some cities have even risen," She said.

"It is possible that such high prices will fall sharply should there be further policies introduced.

"United States, Hong Kong and the mainland all have witnessed huge drops in real estate prices."

Guo Tianyong, head of the China Banking Research Center at the Central University of Finance and Economics, told China Daily it is necessary for the banks to control the risks on investment loans.

He said some banks, in seeking commercial benefits, have loosen restrictions for mortgage loans on second or third homes.

"Banks think that those who buy homes for investment are relatively wealthier than those who just bought an apartment to live, so provide them with the loan without considering their capability to repay," Guo said.

"If banks do not attach enough importance to the mortgage risk control, it is possible the financial crises in the United States, triggered by a dramatic rise in mortgage delinquencies and foreclosures, will be seen in China."

China Daily