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To keep paying the mortgage or not?

By Hu Yuanyuan (China Daily)
Updated: 2008-08-04 09:00

To keep paying the mortgage or not? This question has been bugging 28-year-old Chen Jie for a month now.

The price of the two-room apartment she bought in September, located in Shenzhen's Nanshan district, has fallen by nearly 200,000 yuan ($29,182), down from 11,000 yuan per sq m to 8,200 yuan per sq m.

"The market value of this property has fallen by more than my first installment of 158,400 yuan," says Chen, who is seriously considering giving up the apartment and buying another one on the cheap.

But she also knows clearly the consequences of defaulting on the mortgage: a smudge in the credit record that in turn could mean no credit cards in the future and possibly no more loans either. "I really don't know what to do. But if property prices fall further, I might have to give up the apartment," she says.

Like Chen, some domestic banks are just as antsy. What worries them is that many of their clients are asking themselves the same question as Chen, and coming up with "yes" as the answer. Statistics from Shenzhen Real Estate Research Institute show Shenzhen's property prices dropped 36 percent in May from the peak last year, indicating growing mortgage risks.

Feng Yu, a Shenzhen-based real estate insider, says in his blog that over 300,000 Shenzhen mortgage lenders have seen their asset prices fall and that the scale of Shenzhen banks' potential bad loans could be as high as 100 billion yuan.

"That's far from true. As of May, Shenzhen local banks had outstanding mortgage loans of 220 billion yuan," says a manager at a local bank's credit department who declines to be named. "It's considered bad loan if mortgage payment is not made for 90 straight days."

Shenzhen Banking Regulatory Bureau said on July 25 that local banks' non-performing ratio stood at 0.63 percent by July, down 0.2 percentage points than the beginning of this year.

Most bankers decline to comment, saying "it is a very sensitive moment". Song Liang, marketing chief of China Financial Services Group Limited (Shenzhen branch), a financial intermediary that mainly helps banks to manage mortgage for pre-owned houses, says there are more people deciding not to pay their mortgage this year compared with the last but the number is not as big as some media reports have put it.

"Most people who stop paying mortgages are speculative investors rather than those buying apartments for their own use," Song Liang says. "In fact, property prices in Shenzhen's urban areas don't drop much because of the limited supply and good quality."

In the newly released 2007 Shenzhen Financial Operating Report, by the end of September 2007, 98.5 percent of loans were still in normal status. But the report also says that among mortgage lenders, investment-oriented buying jumped 5 percent compared with 2006, and the proportion of those buying a second or a third home also increased by 14 percent over the previous year, indicating rising risks.

Though mortgage defaults may pick up, experts say it is not likely to trigger a financial crisis as subprimes did in the US, given China's mortgage size and demand for housing. According to the central bank, by the end of March, property-related loans accounted for only 17 percent of all loans in the banking system.

"Some big corrections occurred only in a few cities that experienced crazy property price spurts last year but don't have enough demand to support the market," says Chris Brooke, president and CEO of CB Richard Ellis (Greater China), stressing the market adjustment should be seen on a city-by-city and project-by-project basis rather than an overall collapse.

So far, other cities have not reported mortgage defaults. "Besides, property demand in China is also much stronger than in the US," Brooke says.

But to be on the safe side, most banks have taken measures to improve the mortgage threshold and filter clients more strictly to reduce possible risks.

"Besides the application material that is submitted, such as income statement, we will verify if the apartment that will be bought is the applicant's first or second property, and then check credit records in the central bank's credit collection system," says an official with Bank of China. "But how much mortgage one will finally get also depends on the result of one's property evaluation by three professional evaluating companies rather than the transaction value of the deal."

For instance, if the client bought an apartment for 1 million yuan but the bank's evaluation is 900,000 yuan, the client can only get 630,000 yuan of mortgage rather than 700,000 yuan, she says.

According to an employee of Shenzhen Development Bank, even if the first apartment the client would like to buy is less than 90 sq m, he may still have to pay 30 percent for the first installment instead of the 20 percent as required.

"I do feel banks in Shenzhen have tightened their criteria in giving out mortgage loans and are striving to develop other types of personal loans like car loans," says Song Liang.

Chen Jie's final decision, like most mortgage borrowers now, largely hinges on the property price trend. If prices continue to fall, more will choose to default.

"The sign of a cooling down in China's property market is self-evident. The correction is still going on and may continue until the end of last year," says Li Kongyi, an analyst with Essence Securities.

Property price growth in China's major cities slowed down 1 percentage point in June from the previous month, according to the National Development and Reform Commission (NDRC). The growth rate has dropped for six months in a row. In a statement on its website, the NDRC said property prices in China's 70 large and medium-sized cities rose 8.2 percent year-on-year in June, compared with 9.2 percent in May.

"Though there is still a year-on-year growth in property prices, in some cities prices have plummeted from the peak. Given the continued credit crunch and the poor confidence of consumers and enterprises, there is still room for property prices to slide further in the second half of the year," says Chen Mingchun, a senior economist with Lehman Brothers, adding developers will also have to lower their prices to ensure liquidity.

However, Ben Christensen, head of research for Jones Lang LaSalle Beijing, believes the current wait-and-see attitude in the market does not mean housing demand is evaporating. "If the market doesn't drop as much as people expect after the Olympic Games, prices will rally again and will probably even rise."

Most developers are now betting on sales rising in September and October, normally the best time for property sales. And, the NDRC has just approved the draft design of the country's real estate warning system, covering 40 cities, which will be run by the Ministry of Housing and Urban-Rural Development.

Guo Shiping, head of the financial institute of Shenzhen University, says the peak of mortgage crisis may really emerge at the end of the year as it usually takes people nearly one year to decide to stop paying mortgage after the property market began to slide.