Are Down-Payment Loans Undermining China’s Home Equity?

“China’s home market will never crash because homeowners have to make big down-payments.” This line comes up in nearly every debate and discussion of China’s ever-controversial housing sector.

However, this reasoning may deserve some reconsideration after a recent report in Bloomberg documents how some buyers are able to borrow half of their down-payments from credit firms set up by real estate agencies. And the housing brokers are just the latest to step in to offer these down-payment loans.

In addition to property agencies, insurance companies, real estate developers and other lenders are now all offering these down-payment loans, and adding a new element of risk to China’s real estate market.

What If 30 Percent is Really Zero Percent Down?

The usual 30 percent cash that China’s housing buyers pay when they purchase a new home is one of the most common reasons given when observers argue that China’s housing market cannot crash.

However, in the case cited by Bloomberg, a buyer in Shanghai was able to receive a RMB 280,000 ($45,546) loan from a finance website belonging to E-House – one of China’s largest housing brokers. The one year bridge loan was made with zero interest.

And E-House is not the only non-bank lender to be offering substitutes for savings when it’s time to buy a house.

In September, Ping An Group, one of China’s largest insurers, announced a partnership with two property developers to offer down-payment loans at 121 housing projects across China. The insurance firm is offering the loans at interest rates as low as zero percent through its real estate commerce unit.

In July, Evergrande Real Estate, the country’s third-largest developer, announced that it would allow buyers on at least some projects to borrow the entire down-payment from the property firm interest-free, as an incentive to boost sales.

Housing Slowdown Driving a Search for Easier Credit

Following more than a decade of unprecedented growth, China’s housing market is showing signs of the biggest downturn that most analysts can remember. A recent survey by China Real Estate Information System (CREIS) reported that average new housing prices across China fell for a sixth straight month in October, and the trend is widely expected to continue until the middle of 2015.

With prices beyond the reach of most middle class buyers and the government still reluctant to unleash another surge of credit as it had in response to the global financial crisis in 2009, the real estate industry is looking for alternative ways to supplement buyer savings and encourage home purchases.

During the past year, both Evergrande and China Vanke have made sizable investments in traditional banks, with an eye toward ensuring the availability of credit for their customers. China Vanke took nearly all of the cornerstone stake in Huishang Bank’s IPO late last year, and Evergrande increased its stake in Huaxia Bank to five percent in March of this year.

Elimination of Down-Payments Comes as China Reintroduces MBS

In addition to the sudden appearance of down-payment loans, China’s current market downturn has also sparked other measures design to boost housing sales, but which could also increase risks of bad loans and dodgier lending.

In a September 30th statement, China’s central bank gave commercial lenders the green light to issue more mortgage backed securities (MBS), after the Postal Savings Bank of China issued the first MBS in seven years during July.

China had banned the securitisation of mortgages in 2007 after the debt products had provided the kindling for America’s subprime crisis and helped bring about the subsequent collapse of the housing market.

Now it seems that China’s authorities are at least as afraid of the risks of a housing slowdown as they are of the dangers of reckless borrowing.