Sep 13, 2008 Saturday

China property meltdown feared

Morgan Stanley analysts say prices are cracking in major cities, demand down by half

HONG KONG: China's property market could be headed for a 'meltdown' as home prices and sales slump, Morgan Stanley analysts said.

'Property prices are already cracking in China in major cities,' the investment bank's analysts, led by Mr Jerry Lou, wrote in a note yesterday.

'We believe the likelihood of a property sector meltdown is high.'

Property demand in Chinese cities has dropped by as much as half since the government last year raised minimum down payment requirements and increased rates on some mortgages to cool home prices, said CSC Securities HK analyst Liu Bin. A 60 per cent drop in the stock market this year and concerns that China's economic growth is slowing have contributed to the slump in demand.

Mainland developers, including China Vanke and Poly Real Estate Group, have reported falling sales as government lending curbs deterred home buyers.

Vanke, the nation's biggest publicly traded real- estate developer, said this week that last month's sales fell 35 per cent from a year earlier, the third monthly drop.

The firm said yesterday it has rejected demands from buyers for compensation on homes bought before the company cut prices to boost sales.

One such buyer was Shenzhen resident Li Zhiwei, 38, who paid about 900,000 yuan (S$190,000) last May with 30 per cent down for his 72 sq m home.

After tripling in some districts since 2005, property prices in the city have fallen to earth with such a thud that Mr Li's apartment is now worth less than the 600,000 yuan mortgage he took out.

Mr Li, who pays 7,000 yuan a month, or half of his income, to service his mortgage, blames the real-estate developer for his negative equity.

'I want to be refunded, or they must pay for my loss,' he said.

Mr Li, along with 67 other owners in his complex, is putting pressure on the developer by threatening to swallow a 300,000 yuan loss and walk away from his home - a common occurrence in the United States sub-prime mortgage crisis but still very rare in China.

The spectre of mortgage defaults is hanging over the southern boomtown of Shenzhen as China's property market loses altitude.

By the end of June, 3,612 people in Shenzhen had fallen 90 days behind on their mortgage payments since 2006, causing 1.7 billion yuan of loans to turn sour, according to state media reports.

'Most mortgage defaults come from professional investors who have no intention to hold property for long,' said Ms Hou Liying, a professor at Shenzhen University who specialises in China's property market. 'When prices start to head south, they try everything possible to halt their losses.'

It was precisely in order to tackle such speculative excesses that Beijing introduced a raft of curbs over the past 18 months.

Still, analysts are confident that banks will avoid the big home-loan losses suffered by US lenders.

Mortgages made up just 10.5 per cent of total Chinese bank lending at the end of June, according to the central bank, and house buyers must make minimum down payments of 20 or 30 per cent, reducing the risks that banks run.

But a prolonged drop in prices would be a major worry for the government, which regards housing as a crucial motor of economic development and wealth generation.