Competition for cheap home loans seen crimping demand

Home buyers in Guangzhou fighting for the monthly lending quota of 1 billion yuan (HK$1.3 billion) from the local housing provident fund only have a slim chance of success.

Such loans are much cheaper than mortgages from commercial banks. But last month's quota was snapped up within minutes of its release. The waiting list is long and growing.

The difficulty in securing cheap loans is crimping the property market recovery despite a slew of government measures to stimulate housing demand in the past few months.

"Everyone knows that the market now has limited room to fall further, but transactions are unlikely to revive for the rest of this year," said Li Wenjiang, chief analyst at property consultancy Hopefluent (China) in Guangzhou. He and other analysts said banks would not price their mortgage loans at 30 per cent less than benchmark rate, something encouraged by the central bank last week in the latest move to rev up the slowing economy.

Uncertainties over banks' pricing of mortgage loans have made home buyers and developers cautious. Residential property transactions in Shanghai fell 26.2 per cent year on year to 69,000 square metres during the October 1-7 National Day holiday, but average prices rose 11.4 per cent to 25,451 yuan per square metre, according to data from consultancy Shanghai Deovolente Realty.

In such circumstances, local governments needed to make more efficient use of their housing provident funds if they wanted to support first home buyers, experts said.

A rising number of cities have made it easier for contributors to borrow more from the funds, while also relaxing home purchase restrictions in the past few months to boost demand. Loans of five years and longer from the fund cost 4.5 per cent a year. The benchmark rate for mortgage loans of the same tenure from commercial banks is 6.55 per cent - and with 30 per cent off would still cost 4.6 per cent.

"Everybody wants to borrow cheaper loans, but there are many restrictions when borrowing from the housing provident funds," said Wang Lina, a senior researcher at the Chinese Academy of Social Sciences, a top government think tank in Beijing.

Applications can take months, making it unpopular among developers who want to collect cash from sales as soon as possible. Meanwhile, many local authorities' management of the funds is passive, simply parking huge amounts as cheap deposits at banks.

A report in May from the Hubei province showed the yield for its local housing provident fund was below 2 per cent last year. The fund had an unused balance of 30 billion yuan, with only 30 per cent of contributors benefitting from the fund.

Across the mainland, the authorities collected 6.47 trillion yuan from 106 million workers from the establishment of such funds in 1992 to March this year, with an outstanding balance of 3.27 trillion yuan. Outstanding mortgage loans from banks totalled 10.74 trillion yuan at the end of June, up 18.4 per cent year on year.