Type to search

Chinese homeowners face negative equity shock

(ATF) China’s housing bubble has been inflating for decades – and for just as long economists and analysts have been predicting its collapse. 

If you consistently stick to a point of view it can eventually come true and so it appears in this case: there is growing evidence in most areas that prices are falling, and real estate firms are discounting unsellable homes by huge amounts. 

At the same time the government is changing mortgage borrowing rules. This has left China’s multitudinous house buyers in a state of anxiety.

According to Kylin Financial consulting, published on Neocha.com, housing can be said to be the most important asset for Chinese people. But the bubble has begun to pop leaving many people living in homes worth far less than they bought them for and with no end ion sight to their repayments, Kylin reported. It quotes a scenario in which a buyer with a 750,000 yuan ($110,000) 30-year mortgage with a high interest rate was told by his bank that “all the money was paid for nothing”.

PROPERTY PANDEMONIUM: China’s real estate black hole grows as govt mulls takeovers

For urban populations, with more than 90% owning property, buying a house is arguably the most important thing in life. 

It is commonly understood “you have a house to have a home”. Ten years ago, it was relatively easy for people to buy a house. Home prices in various areas were not too expensive and citizens could still be able to join the housing ladder. But for more than a decade soaring housing prices made it very difficult for ordinary working families to buy a house of their own. Some people will spend half or even a lifetime working to pay off a home loan, but even this cannot halt the average citizen’s enthusiasm for buying property.

Housing prices can be said to be a problem that people who plan to buy a house or even have already bought a house pay more attention to, and it is also a common topic of conversation. The house is becoming more and more important to Chinese citizens, as certain customs prevail such as needing to buy a house for marriage, and buying a house for children to be eligible for good schools. 

The continuously rising house prices have proved a headache for all concerned. For ordinary people with a monthly income of several thousand yuan, mortgages are their biggest expense. Many people who want to buy property turn to shadow banks for financing. In recent years, the state has introduced a series of policies to limit house purchases, so a large number of people choose to borrow by whichever means. According to data calculated by Kylin Finance, the number of “house slaves” in China exceeds 500 million, and housing loans have become the largest monthly expenditure for working families.

Inflation, devaluation

Nowadays, to buy a house with a loan, most people will choose to pay off the principle in 20-30 years. With inflation and a devaluing currency buyers believe the longer the loan period, the better. 

But is this really the case? Before March, buyers could repay loans at a fixed interest rate. Since then, a change in finance rules means repayments of housing loan will depend on the LPR interest rate, which changes over time. 

If calculated at a fixed interest rate of 5.45%, a house loan of 750,000 yuan might be paid off in 30 years. If the principal and interest are equal, then the mortgage interest during the 30 years will be about 774,000 yuan, if the principal is equal, the 30-year mortgage interest will be about 614,000 yuan. The difference between these two different repayment methods is about 160,000 yuan. 

Some bank employees said that most people choose to repay the loan, but they are in effect giving money to the bank “for nothing”. In fact, different repayment methods have very different interest rates. In addition to these two, there are other ways to reduce interest expenses. These are early repayment, shortening the repayment date or going to biweekly payments.

READ MORE: China’s Xi praises Shenzhen, backs property rights

Early repayment is only suitable for a small group of people. The reason why people choose to buy a house with a loan is because they have insufficient funds. Those whose capital investment has appreciated in a short period of time can choose to repay early. It is worth noting that each bank has a different system for applying for early repayment. Generally speaking, there are only five opportunities, so you buyers must consult in advance and pay attention to whether there are any requirements for early repayment in the contract.

As China’s house prices have already begun to fall, and are expected to fall dramatically next year, “house slaves” will be left sitting on negative equity.

As housing is so integral to the 42% of the population that lives in China’s urban areas this will be a huge shock. One buyer told Kylin Finance he had saved for decades “all for nothing”. Once Chinese house buyers enter negative equity they will be working for less than nothing, and will likely lead to a psychological shift in the population.

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.


AF China Bond