A high down-payment requirement has been safeguarding China’s banking stability, as it has buffered lenders against falling property prices. Other countries, like Canada, allow down payments for first home buyers as low as 5 per cent.
Our analysis indicates that mortgages drawn in 2021 have the lowest value-to-loan ratio, ie the buffer. They owe banks CNY4.8 trillion. But the mark-to-market value of the original amount was CNY4.7 trillion. Since they began with 30 per cent down payments, the total property value remains 42 per cent higher than the outstanding loan.
It also means if China’s property prices drop 30 per cent from the 2022 level (a fall from CNY6.7 trillion to CNY4.7 trillion) this cohort, which represents 12 per cent of the value of the mortgage book, will experience negative equity. If property prices drop by half, total negative equity will rise to CNY19.8 trillion, covering 51 per cent of China’s total mortgage portfolio.
Beware of free fall
China’s authorities used to have a ban on price cuts for new developments which was intended to avoid triggering a major revaluation of real estate. On 20 August, however, an official newspaper of the Ministry of Housing and Rural-Urban Development opined that local governments should allow developers to cut prices to relieve their cash flow problems.
Recently Zhuhai’s local authority endorsed a price cut of a property project from its original listing price of CNY26k/m2 to CNY19k/m2, down 27 per cent within two years. The pace of the fall is fast. If other cities follow, China’s property prices will come under severe downward pressure.
Massive and rapid property price corrections are not unknown. During Japan’s “Lost Decade,” Tokyo’s new apartment prices fell by 30 per cent in two years after the bubble burst. And a property collapse in Hong Kong saw a 30 per cent correction in four months from October 1997 to January 1998 resulting in massive negative equity.
Sharp property price corrections in Tokyo and Hong Kong