Shanghai property evaluators turn out to be agents of destruction

'It was common that flat buyers did not even have to pay down payments because of the overvaluation. In extreme cases, some buyers may even get some extra cash.'

Phinex Wong

Shanghai estate agent

WHAT A WAY to run a property market. Banks in Shanghai are comfortable with fixed prices for new flats but do not really understand how prices are established in a secondary market. It is a shortcoming common to financial systems accustomed to directed lending.

This did not stop them from getting into the mortgage market for secondary properties, however. They just took the risk, did not overly bother themselves with credit checks or valuations and, until recently, things worked out fine, seeming confirmation that they were conducting their mortgage business the right way.

One thing they were obviously doing wrong, however, was relying on estate agents for valuation of these secondary-market properties. No one else had any expertise in it and thus the estate agents got the job.

But what estate agents want is lots of middleman business in buying and selling properties. They naturally looked for every trick they could find to bring this business in and what better could there be than giving banks valuations that were higher, sometimes obviously much higher, than transacted prices?

It certainly makes life easy for buyers. Agree your price and then get your agent to give your bank a valuation that is much higher than the price you paid. When your bank then thinks it has been prudent in following guidelines to give you a mortgage of only a stipulated percentage of that figure, it has actually advanced you the whole figure and, if the stories are correct, in some cases more than that.

Matters have now started to go awry, however. Credit has been tightened with the latest edicts from Beijing, property prices are no longer rising as fast as they were earlier this year and meanwhile an enormous amount of property is under construction, threatening to flood the market over the next two years.

I do not swear absolutely by the figures in the two charts. They come from government statistical sources in Shanghai and I have never entirely trusted them although the trend they show probably is accurate.

But it should be no surprise that banks in Shanghai are now reporting rising figures for non-performing loans in the secondary property market.

We have already seen it happen in the vehicle sector - enormous growth in car purchases, all of them highly leveraged, and then came the credit tightening measures that suddenly revealed the imprudence of much of the lending. The car buyers walk away, feeling aggrieved that car prices have started to come down, and up to 50 per cent of car loans are now reportedly non-performing.

The word for this is 'bubble' and the pin is being stuck into it. The authorities in Beijing may believe that they have only introduced some measures to cool down an element of overheating but the hard fact is that when prices start to go down from the top of a speculative bubble there is no stopping them and no stopping the fall-out among banks.

I do not say the mainland faces an acute and immediate financial crisis, as opposed to the chronic one that always plagues its financial system, but the trend of recent news from key cities certainly suggests Beijing had best be on its guard.

And for the benefit of that dwindling band of Shanghai-boosters who like to think their city will soon supplant Hong Kong as a financial hub, let me point out that the three-month mortgage delinquency rate in Hong Kong has now fallen to only 0.47 per cent and the overall three-month overdue ratio for banks is now only 1.4 per cent, down from 7.4 per cent in 1999.

There is no comparison to be made at all. We are in a different league.