http://www.businesstimes.com.sg/spec...-loan-20130221
Published February 21, 2013
'Mortgaging' entire life to repay a home loan
'Housing slaves', a part of China's growing middle class, help real estate prices rebound
[SHANGHAI] Sherry Sheng, a 29-year-old Shanghai policewoman, bought herself a 4,000 yuan (S$792) black fur jacket, splurging for the last time before she starts paying off the mortgage on her first home.
Ms Sheng is part of a generation of middle class that Chinese media has dubbed "fang nu", or housing slaves, a reference to the lifetime of work needed to pay off their debts. They're taking on mortgages even as the government maintains property curbs to damp prices that have almost tripled since China embarked in 1998 on a drive to increase private home ownership.
"It's a treat for myself because I could never afford such a luxury after I start repaying my housing loans next month," said Ms Sheng, who paid 1.1 million yuan for the one-bedroom apartment on the city's western outskirts and will be using about 70 per cent of her salary to service her mortgage.
China's growing middle class reaching for homeownership helped property prices rebound starting in the second half of last year. They rose one per cent in January from December, the biggest gain in two years, according to real estate website SouFun Holdings Ltd. Home prices in Beijing and Shanghai each rose 2.3 per cent from December.
Average prices
Average per-square-metre prices in 100 cities tracked by SouFun are five times average disposable incomes. A 100-sq-m apartment today costs about 40 years' income, according to SouFun and government data, even as salaries have more than quadrupled since 1998.
Ms Sheng was able to buy her 50-sq-m apartment after borrowing a combined 770,000 yuan through a 20-year mortgage from Agricultural Bank of China Ltd and a 15-year loan from the local housing providence fund. Her parents helped with the 30 per cent down payment. She will repay about 4,000 yuan a month for the home, a one-hour subway ride from central Shanghai's historic Bund that cost 16 times her annual salary, based on the apartment price and her income.
Chinese homebuyers typically use 30 per cent to 50 per cent of their monthly incomes to repay mortgages, said Wu Hao, a manager at the loan brokerage of Bacic & 5i5j Group, Beijing's second-biggest realtor for existing homes. It advises clients to keep monthly repayments lower than one-third of their incomes.
The "general guideline" among Chinese banks is that a borrower's salary should be at least twice their monthly payment; otherwise they'll be asked to submit proof of assets, such as property, cars, or insurance to show their ability to service the debt, Ms Wu said. Using 70 per cent of monthly income to pay the mortgage is "very rare", she said.
Mortgage rates, which move with the benchmark interest rate, usually have maturities of five to 30 years. The People's Bank of China's benchmark lending rate for loans longer than five years now stands at 6.55 per cent.
Outstanding residential mortgage loans grew 12.9 per cent last year to 7.5 trillion yuan, the slowest pace in four years, as China tightened lending, according to central bank data. A credit binge in 2009 fuelled inflation, weakened banks' financial buffers and led to an increase in soured loans.
Still, analysts remain upbeat on Chinese banks. Mortgage loans accounted for 20 per cent of the total loan portfolio of China Construction Bank Corp, the nation's largest mortgage lender, at the end of June, while at Industrial & Commercial Bank of China Ltd, the second largest, the ratio was about 14 per cent, according to their first-half earnings reports.
Stable property prices in 2013 "should benefit CCB the most, as it has the highest real estate-related exposure among the H-share banks", Grace Wu and Leon Qi, Hong Kong-based analysts at Daiwa Capital Markets, wrote in a Jan 22 report. H shares are the shares of Chinese companies traded in Hong Kong.
Sales volume
Developers also are benefiting as homebuyers rush to buy because they expect prices to rise further. China Vanke Co, the biggest developer that trades on Chinese exchanges outside of Hong Kong, said sales rose 56 per cent last month from a year earlier, while Evergrande Real Estate Group Ltd, the country's largest developer by sales volume, said its January sales more than tripled.
The volume of residential property sales in China will rise this year, driven by improved funding to developers, Fitch Ratings said in a Jan 29 research report. The property market has already "heated up", while home prices in major cities may rise as much as 10 per cent in the next three months, said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK Securities Research.
Loose monetary policy will drive housing prices and sales up in the near term, Hong Kong-based Jinsong Du, Credit Suisse Group AG's head of property research, wrote in a report on Feb 18.
Credit Suisse favours Hong Kong-traded Chinese developers with "strong" sales and "less expensive" valuations, such as Country Garden Holdings Co, controlled by China's richest woman Yang Huiyan, and Poly Property Group Co, a developer that is partly state owned, Mr Du said. Country Garden and Poly Property trade at a ratio of about eight times estimated profit, compared with 13.4 times for the Hang Seng Property Index, according to data compiled by Bloomberg.
The central government has since April 2010 moved to stamp out speculation in the property market by raising the down-payment requirement on first mortgages to 30 per cent from 20 per cent, ordering a minimum 60 per cent deposit for second-home purchases and an increase in rates for second loans. It also imposed a property tax for the first time in Shanghai and Chongqing, and enacted restrictions in about 40 cities, such as capping the number of homes that can be bought.
The new government may introduce more property curbs when it takes power in March. China may tighten credit policies for people buying a second home or raise the tax on gains on transactions of existing homes in the most affluent, or so- called tier-one cities, the China Securities Journal reported on Feb 1, citing an unidentified person.
Disposable income
Home sales in China's 10 biggest cities almost quadrupled to 8.5 million square metres in the first five weeks from last year, property data and consulting firm China Real Estate Information Corp said on Feb 19.
"The uncertainty lingers as the government may issue new tightening policies if home prices are rising too fast," said Tian Shixin, a Shanghai-based property analyst at BOC International China Ltd.
Chinese urban residents' average disposable income rose 12.6 per cent last year to 2,047 yuan a month, according to the statistics bureau. The average one-square-metre of new floor space cost 9,715 yuan in December, according to SouFun.
The shift to private home ownership stems from reforms started in 1998, when then-premier Zhu Rongji privatised state-owned housing provided at low rents to urbanites, transferring home ownership from the government to the families occupying the dwellings. About 230 million people moved to cities in the 2000-2011 period, the biggest urbanisation in history, according to the Chinese Academy of Social Sciences.
The idea of buying a property with borrowed money didn't become popular until 2004 when home prices in major cities started rising fast enough to compensate for interest payments, enticing buyers to borrow to buy property, said Liu Yuan, a Shanghai-based researcher at Centaline Property Agency Ltd, China's biggest real estate brokerage.
Today about 50 per cent to 70 per cent of home buyers in the first-tier cities of Shanghai, Beijing and Guangzhou use mortgages, borrowing an average 50 per cent of a home's value, according to Centaline.
Cai Yue, a 33-year-old manager at a Shanghai-based pharmaceutical company, bought her first home 10 years ago after graduation, among the first wave of Chinese taking out mortgages as the government tried to encourage home ownership by offering income tax rebates and the cheapest funding in two decades.
Ms Cai borrowed 50 per cent from the bank for her 300,000 yuan apartment in 2003. Her monthly payment was 1,600 yuan, about 40 per cent of her salary at the time.
'Reasonable term'
"It was quite a modern idea to take on a mortgage back then," said Ms Cai, who earned 3,700 yuan a month back in 2003 and declined to disclose her current income.
With home prices of 6.8 times of her annual income, Ms Cai was able to pay off her debts in 2007 and buy a second home for two million yuan that same year. Her first home, the 75-sq-m apartment about 8km north of the Bund, has surged sixfold in value. Ms Cai paid off all her mortgages in December and is barred from buying a third apartment in Shanghai.
"The housing slaves term is quite reasonable because it will put a lot of burden on home buyers if housing payments are more than half of their incomes," said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. - Bloomberg
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