Editor's note: This is the first of a four-part series on the development of the mainland property market in the light of increasing government measures to combat excessive speculation and to stabilize prices. The next instalment will examine the impact these measures are having on developers. This story was written by Wang Zhenghua in
Shanghai based on his own reporting in the city, and Hu Yuanyuan in Beijing, Chen Hong in
Shenzhen and Li Wenfang in Guangzhou.
Escalating government measures to cool off the property markets in many mainland cities are forcing banks to re-assess what has been one of their most profitable businesses mortgage loans.
This is creating a dilemma for many banks. Concerned government officials have pointed to, among other things, the potential risk for lenders in a liquidity-driven property boom, which can turn to bust when the cost of capital, or opportunity cost, begins to swing in the other direction. But many bankers, who have no doubt been aware of such risks for quite some time, have been reluctant to take the initiative in curtailing their mortgage lending business because doing so could make an immediate and considerable dent in their performance.
Confronted by the government's show of resolve in its latest measures introduced last month, banks are running out of excuses to continue dragging their feet. Some of the larger city banks that have been most active in the mortgage lending market, which provides the major impetus for profit growth, are taking steps to tighten their loan policies.
Most of these measures introduced by the banks are seen to be minor adjustments, which will be unlikely to result in any appreciable tightening of credit. But taken together, they represent a fundamental departure in the lending policies pursued by banks since the property boom began to take off several years ago.
More important, perhaps, is the fact these initiatives from the banks could themselves dampen the speculation widely considered to have contributed greatly to the surge in property prices in some cities, taking them to levels that fewer and fewer people can afford. Rampant speculation poses the greatest risk to the stability of the property market because highly leveraged speculators could be forced to unload their purchases in a stampede at the first sign of a price reversal.
For that reason the move taken by Bank of Communications (BoCom) in
Shanghai earlier this month, to offer better terms to genuine homebuyers and cut back on lending to speculators, was considered to have set an example for other banks that are seeking to draw a similar line. The bank said it would offer homebuyers 30-year mortgage loans of up to 80 per cent of the value of properties of no more than 90 square metres at preferential interest rates that are at least 10 per cent lower than the average for other borrowers.
Ni Erkang, head of BoCom's policy department, said these terms could help qualified applicants, mostly first-time homebuyers, to save 30,000 to 40,000 yuan (US$3,750 to US$5,000) in total interest payments on a loan of 1 million yuan (US$125,000.)
"Our proposal complies with the government's measures to clamp down on excessive speculation and answers the central bank's call to be more selective about borrowers," Ni said.
It is good for BoCom too, Ni added.
"The attractive terms we offer to genuine homebuyers can increase our mortgage loan portfolio and, at the same time, reduce risks," he said. Mortgage lending accounts for an estimated 10 per cent of BoCom's total profit.
Meanwhile, BoCom has introduced other measures that will make it easier and cheaper for homebuyers to obtain mortgage financing. These measures include preferential interest rates, flexible repayment terms and reduced, or in some cases exemption of, handling charges. Credit-worthy customers can borrow up to 500,000 yuan (US$62,500) in unsecured loans.
But speculators need not apply, unless they are willing to advance a down payment of at least 40 per cent of the value of the property and pay higher rates ranging from 20 per cent to 30 per cent above the average.
Ni said BoCom was becoming increasing stringent in processing mortgage loan applications.
"Our assessment staff have been instructed to pay greater attention and apply a stricter criteria to the location of the property, the age and condition of the building and the price of the property when it was new," said Ni.
Indeed, banks around the nation are taking a much more cautious approach to mortgage lending. Huaxia Bank in Beijing, for instance, is more "critical" in approving loans for investment purposes, said Zheng Jing, manager of Huaxia's personal loans centre.
"Our approach is to raise the down payment percentage and increase the interest rates for loans to investors and speculators," she said.
Like many other banks, Huaxia requires a minimum down payment of 30 per cent for property with a total area bigger than 90 square metres, compared with 20 per cent for smaller apartments. For villas, the down payment can be as high as 50 per cent. Higher down payments are required for larger apartments and villas because they are more popular with investors and speculators than smaller apartments.
The mortgage interest for what bankers consider "investment-oriented" properties and villas is now set by most banks at about 1 percentage point above the average rate of 5.751 per cent a year. "We generally discourage loans to people buying properties for investment purposes," said Zheng. "We'll either require a higher down payment or flatly reject the application from investors and speculators," he added.
Yao Libao, manager of
Shenzhen Development Bank's individual loans centre, said his bank is also shying away from lending to property speculators. He said his banks apply the same criteria in assessing the credit worthiness of all applicants. But "we are less inclined to lend to buyers of high-end or investment-oriented properties," he said.
Unlike its many counterparts in
Beijing and Shanghai, Guangdong Development Bank in
GuangZhou has no plans to take action on mortgage financing. "Many prospective homebuyers and investors are sitting on the sideline as the full impact of the government measures unfolds," said Liu Xiangdong, an executive in the bank's consumer banking department. "Demand for mortgage loans has been on the decline," he said.
But bankers in
Shenzhen seem less sanguine. Wang Jian, manager of
Shenzhen Development Bank's housing and consumer credit department, said his bank set a "very strict" approval criteria for mortgage loans to the second-hand housing market even before the introduction of the government measures.
Now, "we are paying more attention to the credit worthiness of the borrowers," Wang said. In doing so, "we look beyond the income of the applicant and the value of the property," he said.
For example, if a
Shenzhen resident applies for a mortgage loan to buy a property outside the city, "we know that he is not a homebuyer," Wang said. "We would either reject the application or charge him a much higher interest rate," he said.
