China Economy

China Economy

How homebuyers are exploiting loopholes to snap up property in top Chinese cities as prices skyrocket

Investors’ zigzag route to riches is fuelling property market frenzy and inflating asset bubble

PUBLISHED : Tuesday, 30 August, 2016, 11:04am
UPDATED : Tuesday, 30 August, 2016, 9:11pm

As the property market in China’s top cities heats up, people like office worker Steve Wang are trying every possible way to take on more personal debt in a bid to grab a piece of the sizzling market.

Described by his friends as a walking encyclopaedia on credit policy, Wang , 37, has obtained “consumer loans” – supposedly for overseas tours or home renovation – and used the money for down payments in property deals.

That has enabled him to own two flats in downtown Shanghai with a combined value of more than 10 million yuan (HK$11.6 million) – something that would have been impossible without the leverage supplied by the banks.

And now he’s watching the value of his properties climb by the day.

The home-buying spree is like the rising sun and we are now only in the morning session
Chen Ji, Bank of Communications

Wang is just one of millions of Chinese investors who have decided that property in top cities is their only viable investment option, taking advantage of every possible loophole in China’s restrictive home-buying rules to hop on the bandwagon.

And it’s not just individual investors who are diving into the market.

Their investments are dwarfed by the amount of money – often borrowed – that industrial and financial enterprises are pouring into real estate in major cities.

But these moves are contributing to China’s growing asset bubble risks, which in turn pose a looming threat to economic growth.

A rush for trophy land and properties in China is putting a squeeze on the credit resources available to its factories and workshops – the cells of a healthy economy – and is undermining Beijing’s efforts to put the world’s second-biggest economy on a sustainable path.

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The latest credit data showed virtually all newly offered bank credit in July was taken up by households, while new lending to industrial firms shrank, leading to a contraction in corporate capital spending.

Chen Ji, a researcher at Bank of Communications, mainland China’s fifth-biggest lender, said the zealous pursuit of properties in major cities like Shanghai was more likely to heat up than to cool down.

“The home-buying spree is like the rising sun and we are now only in the morning session,” Chen said. “The market is standing opposite policies; the tighter the policies, the stronger the desire to secure home deals.”

Residential property prices in top Chinese cities are surging.

Prices for newly built homes in Beijing shot up 22.7 per cent year on year in July, while Shanghai saw a rise of 33.1 per cent and Shenzhen 41.4 per cent, according to the National Bureau of Statistics, an agency often accused of underreporting China’s real house price increases.

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Thanks to the central bank’s release of an unprecedented amount of cash – China’s broad money supply is about twice that of the United States – and governments in big cities reducing the supply of land, property prices in the mainland’s top cities are now quickly closing in on those in the world’s most expensive cities, including Hong Kong, London and New York.

The average price of new homes in Shanghai, excluding government-subsidised affordable housing, hit a record high of 41,259 yuan per square metre in the week ending August 21, up 4.9 per cent from the previous week, according to Shanghai Homelink Real Estate Agency.

One property project in Beijing, Wanliu House, is selling for 145,000 yuan per square metre, a price level quite close to that for apartments at One Kai Tak in Hong Kong, being built on the site of the city’s former airport, which range from HK$15,080 to HK$18,418 per square foot.

Prices have surged despite tough administrative restrictions on home purchases.

On the mainland, a down payment of at least 20 per cent is required on a first home, rising to 50 per cent for a second home in cities like Shanghai. In cities like Beijing and Shanghai, one household can buy only two homes.

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The price gains have rung an alarm bell for policymakers in Beijing as well.

In a lengthy interview published in People’s Daily in May, an unidentified “authoritative figure” – widely believed to be Liu He, President Xi Jinping’s right-hand man in managing the economy – warned that leveraged buying was dangerous.

“A tree can’t grow as high as the sky,” the interviewee said. “Houses are for people to live in – we should reduce housing inventory by urbanising people instead of increasing leverage”.

But the large stock of unsold housing in smaller cities and towns across China has only made property in top cities more attractive, resulting in a polarised housing market.

That has prompted people like Wang to squeeze every penny they can from banks and to throw into the housing market.

Many well-educated, middle-class city dwellers are worried they may be priced out of the market if they do not use grey channels to get into it now.

“Where there is a will, there is a way,” Wang said of his zigzag route to buying a three-bedroom apartment in North Bund, a premium Shanghai location, for 5.8 million yuan late last year. It’s now estimated to be worth 8 million yuan.

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To begin with, since Wang and his wife can own only two flats, they had to sell a small flat in order to be able to buy a new, bigger one.

They first repaid consumer loans from “bank A” that helped them buy the apartment where they now live, using money from friends, so that they had no outstanding consumer loans, because banks might suspect that existing consumer loans could be channelled into the down payment on a new home. They then went to “bank B” to apply for mortgage loans. Once they were granted that, they applied to “bank C” for 800,000 yuan in collateral-free consumer credit and used it to repay the money they had borrowed from their friends.

Since Wang, his wife and five-year-old son already have a home, the second home is purely for investment.

In a country where the stock market is notoriously volatile, deposit rates are low and outbound personal investment is restricted, property is always the preferred investment option.

“We still believe in the strength of Shanghai’s housing market as there seem to be no other, better investment options,” Wang said.

China’s privatisation of the residential property market in the late 1990s has improved the living conditions of millions of urban households and reshaped the skylines of Chinese cities. Property is now the main store of household wealth for most urban families.

The mainland has never experienced the serious bursting of a property bubble, unlike Hong Kong and Japan, and housing prices in Chinese cities have kept on rising, repeatedly defying doomsayers’ predictions.

But as they keep rising, so does the risk that a day of reckoning day could eventually poison bank balance sheets, dry up local government revenue and bring economic growth to a halt.

Signs of those problems have already been witnessed in some rust-belt areas.

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Raymond Yeung, chief China economist at ANZ, said household mortgage growth was unsustainable, with signs that property investment and sales had already peaked.

“There could be problems ahead if households fail to repay the loans once China reverses from the current monetary policy and embarks on an interest rate hike path on rebounding inflation in the future,” Yeung said.

Beijing-based consulting firm iResearch said this year it expected household credit to rise to 41.1 trillion yuan by 2019 – at a compound annual growth rate of about 21 per cent – and that home mortgages would account for 75 per cent of the total.

Hu Yifan, a China economist with UBS, said household debt in China remained modest compared with the heavily indebted corporate sector, but it was not a good sign for the Chinese economy if middle-class consumers were stretching their finances to buy homes.

She wrote in a note that “housing fever” could damage the economy if it detracted too much from consumer spending, while “rising fever on the housing market ... will push up household debt”.

Behind the numbers, even the seeming beneficiaries of China’s property price boom are feeling the strain.

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Wang’s wife worries that her husband has overstretched their household budget by investing too much in the home market, because they have to use 70 per cent of their combined income to meet mortgage repayments.

“It’s like robbing Peter to pay Paul,” she said. “I don’t dare to imagine if illness happens in the family as there is really scarcely any money left after paying mortgages, consumer credit, my son’s kindergarten fees and daily expenses.”