Higher rates may spur loan defaults
Think-tank warns of added burden on homebuyers
A central government think-tank has issued a stark warning over the heightened risk of loan defaults by low- and middle-income homebuyers as a result of interest rate increases.
A research paper published on Wednesday by the Chinese Academy of Social Sciences' Institute of Economics found that the monthly mortgage payments for middle- income homeowners exceeded half of their total household income.
There is an internationally accepted safe limit for homebuyers taking out loans that recommends borrowing no more than a third of household income.
The People's Bank of China has raised bank deposit and loan interests rates three times since April, pushing up the one-year benchmark interest rate for loans from 5.58 per cent to 6.39 per cent.
The interest rates for loans of six years and longer, which applies to most homebuyers, have risen from 6.12 per cent to 7.11 per cent during the same period.
If a homeowner takes out a 500,000 yuan loan for 10 years, monthly payments will rise by an additional 200 or 300 yuan, subject to bank discounts, to 5,833.80 yuan a month because of the latest rate increases. Families earning less than 60,000 yuan a year can be defined as a middle-income family.
Wang Lina , a research fellow who led the institute's two-month project on the housing markets in Shenzhen, Beijing and Shanghai, said it might be too early to predict big defaults on loans.
'But homebuyers from low- and middle-income families would no doubt have more difficulties in paying back loans, particularly those who have a cash-flow problem as a result of sickness or unemployment,' Ms Wang said.
The research was based on interviews with homebuyers, developers and local government housing departments.
The central government started raising interest rates from 2004 in a bid to curb excessive market liquidity due to the mainland's soaring foreign reserves and trade surplus. Authorities have also tried to use the rate-increase mechanism to cool the property market.
Nevertheless, housing prices in 70 large mainland cities grew by 5.9 per cent in February, with prices for new projects in Shenzhen and Beijing rising by 9.9 per cent and 9.7 per cent, respectively.
Ms Wang said developers would no doubt pass extra costs incurred by the rate rises and expensive land purchases on to homebuyers.
Guangzhou-based real estate analyst Han Shitong noted that the one-percentage-point interest rate rise in less than two years might seem insignificant compared with growth in gross domestic product and rapidly rising housing prices, but 'it's like rubbing salt into the wounds' of low-income homeowners.
Ms Wang echoed his sentiment saying homeowners would definitely feel the pinch. 'Those who can't really afford a house are finding buying a home is now even more difficult,' she said.
