China Helps First-Home Buyers as Market Cools: Mortgages

Photographer: Nelson Ching/Bloomberg

Apartments and commercial buildings stand in Beijing. Close

Apartments and commercial buildings stand in Beijing.

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Photographer: Nelson Ching/Bloomberg

Apartments and commercial buildings stand in Beijing.

Kevin Xi had no trouble getting a mortgage to buy a 1.53 million yuan ($242,563) one-bedroom apartment in Beijing last month, even as China’s government tries to cool the housing market. He even got a 10 percent reduction on interest.

“I didn’t expect to get such a good rate,” said Xi, 27, an employee of a property company whose 960,000 yuan mortgage loan with Bank of China Ltd. was approved within five working days. “I thought only employees from government agencies or state-owned companies qualified.”

The government is pushing in two directions as it seeks to slow price growth while avoiding a collapse. It’s lowering borrowing costs for first-time homebuyers to encourage purchases while Premier Wen Jiabao keeps curbs in place to stem the speculators who have helped drive home prices up by as much as 140 percent since 1998. China’s 18 percent first-quarter drop in home sales contributed to the slowest economic growth in almost three years.

“Property is an important sector for China’s economy,” said Jack Gong, a Hong Kong-based property analyst at Jefferies Group Inc. “The central government will not forcefully crack down on the market even if it is not supporting it. Fine-tuning the mortgage policies shows the government’s clear intention to uphold economic growth.”

The benchmark rate for mortgages in China is the five-year lending rate set by the People’s Bank of China, currently 7.05 percent. Bank of China, China Construction Bank Corp. and Agricultural Bank of China Ltd. offer as much as a 10 percent discount to borrowers the banks deem as safest in Beijing, while smaller lenders such as China Merchants Bank Co. and Bank of Beijing Co. are charging the benchmark rate, according to Bacic & 5i5j Group, Beijing’s second-biggest real-estate agency.

Government Easing

Lenders in Beijing started offering mortgages to first-home buyers at or below the central bank’s benchmark rate in February, compared with rates 5 percent to 10 percent higher in the second half of last year, said Wu Hao, a manager at the loan brokerage of Bacic & 5i5j. Home buyers in Beijing and Shanghai could get as much as a 15 percent discount, according to the realtor.

The lower mortgage rates for those buying their first properties are an indication that the government may gradually ease its more stringent home-purchase restrictions in the second quarter, according to CLSA Asia-Pacific Markets, a unit of Credit Agricole SA.

‘Gradual Easing’

“It is clear that the government has eased its controls over bank lending to first-time homebuyers,” said Andy Rothman, CLSA’s China macro strategist in an interview in Shanghai. “These are the first hints of what will be gradual easing of central government enforcement of the house purchase restrictions.”

Home sales in 33 out of 40 cities jumped in March from the previous month, according to SouFun Holdings Ltd., the country’s biggest real-estate website.

Xi is ready to move into his new one-bedroom 58 square- meter (624 square-foot) home, which he said had basic décor and he didn’t plan to renovate. The five-year-old apartment is located outside Beijing’s Fourth Ring Road, one of the capital’s six highway loops.

Property Curbs

China’s campaign to put the brakes on a surge in property prices began two years ago and measures in place include higher mortgage and down-payment requirements, and home-purchase restrictions for about 40 cities. Home prices grew 6 percent in 2010 after surging 25 percent the previous year when the government started imposing the curbs. Last year, the statistics bureau changed the way it calculates home prices, abandoning a nationwide index.

Home buyers in China are required to put down 30 percent of the property’s price to purchase their first home and 50 percent for a second property. Down payments were raised to 40 percent and 60 percent for first and second homes, respectively, in China’s eastern province of Zhejiang last year as part of the government’s efforts to keep housing affordable.

Authorities have refrained from cutting interest rates amid inflation concerns. The central bank increased interest rates three times last year.

Large Down Payments

About 50 percent to 70 percent of home buyers in China’s major or first-tier cities of Shanghai, Beijing and Guangzhou take out mortgages to buy homes, borrowing on average 50 percent, according to Centaline Property Agency Ltd., China’s biggest real-estate brokerage. The loans, whose rates move with the benchmark rate, usually have maturities from five to 30 years, depending on borrowers’ ability to repay.

Buyers in smaller cities, the so-called second- and third- tier cities such as Wenzhou in Zhejiang province, tend to pay cash. That compares with Australia, where more than 35 percent of new homeowners in the quarter ended Dec. 31 borrowed at least 80 percent of their property’s value, according to central bank figures.

“The smaller the cities the buyers are in, the more willing they are to pay cash,” said Liu Yuan, a Shanghai-based Centaline researcher. “Interest rates are not really affecting home purchase decisions. Chinese buyers care more about current discounts rather than the lower costs for borrowing money.”

Unsold new homes in 10 cities, including Beijing and Shanghai, tracked by Bacic & 5i5j jumped 46 percent from a year earlier to 594,500 units as of March 31, indicating rising risks and a higher probability that local governments may “fine- tune” policies to reduce inventories, the agency said in an April 13 report.

Sales Rebound

The central bank said last month it will ensure that “loan demand from first-home families” is met. Housing Minister Jiang Weixin said in December that China would prioritize loans for first-home buyers and support reasonable property purchase demand. The government has lowered the amount of cash that banks must set aside as reserves twice since November to boost liquidity and spur loan growth.

Home sales in March reached 373.3 billion yuan, surpassing the first two months of the year combined, according to the government data on April 13.

March home sales at China Vanke Co. (000002), the biggest developer by market value listed on Chinese exchanges, jumped 23.5 percent from last year to 11.5 billion yuan, while Poly Real Estate Group Co. (600048) said they rose 47 percent. Mortgage lending discounts boosted demand from first-home buyers, said Tan Huajie, Vanke’s board secretary in an e-mailed statement on April 5.

Currently about 80 percent to 90 percent of purchasers in the market are first-time buyers, according to Century 21 China Real Estate, the country’s second-biggest brokerage.

Fine Balance

Outstanding mortgage loans rose 15.5 percent to 7.1 trillion yuan last year, slower than the 29.5 percent expansion in 2010, as banks suspended lending for third homes and tightened criteria on second homes, according to a central bank report released Feb. 15.

China Construction Bank, the world’s second-biggest lender by market value, was one of the first Chinese lenders last year to increase the interest rate for first homes to 10 percent more than the benchmark rate. Now it is offering mortgage rates “appropriately” lower than the benchmark for first-home buyers to reduce their borrowing costs, the lender’s Vice President Zhao Huan said at a briefing in Beijing March 26.

The government should gradually loosen or even support demand from end users, such as first-time homebuyers, to offset the sharp decline in investment demand, according to Citigroup Inc. China’s economy grew a less-than-forecast 8.1 percent in the first three months from a year earlier, the slowest pace in 11 quarters, according to government data on April 13.

“The central government is searching a balanced point between tightening and loosening the policies,” wrote Citigroup’s Hong Kong-based analysts led by Oscar Choi in a report on March 29.

Price Cuts

The central city of Wuhan allowed some first-time home buyers to pay as little as 20 percent down payment with loans from the public housing fund, the official Xinhua News Agency reported on April 24, citing the local authorities. Interest rates on loans from the housing fund usually are lower than the lending rate. Residents usually pay a portion of their income each month into the fund to be eligible for such loans, while their employers also contribute.

The biggest mortgage discounts Chinese banks offered were as much as 30 percent below the benchmark rate in 2008, when the country’s home sales slumped 17 percent, retreating for the first time since the 1998 privatization of the housing market.

It was unlikely banks would offer those kind of discounts this year because they would hurt their profitability, according to UBS AG.

The impact on home sales of lower mortgage rates for first- home buyers is limited, because buyers would rather wait for more price cuts with the government’s determination to bring home prices down, Chen Li, head of China equity strategy at UBS, said in an interview in Shanghai. Home prices fell for the seventh month in March from February, according to SouFun.

‘Resolute’ on Restrictions

China’s Premier Wen Jiabao has said the government will “resolutely” maintain its curbs on the property market, and the country’s home prices were far from a reasonable level.

“Direct price cuts would be more effective than mortgage rate discounts,” Chen said. “ Hadn’t Wen made such remarks, the easing of mortgage lending rates would have given a bigger boost to the market.”

As for Xi, he says he is just happy to have gained entry into Beijing’s property market, where prices have surged 30 percent from the beginning of 2009 to the end of 2010, even though his commute to work will increase to about one hour by public transport from a 15-minute walk from the apartment he rents now.

“I just like finally having my own place, even though that means I’ll spend more time on the road,” said Xi. “I think home prices in Beijing will still rise, and since I’m qualified to buy here, why not just go ahead.”

--Bonnie Cao, Zhang Dingmin. Editors: Andreea Papuc, Rob Urban

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net; Zhang Dingmin in Beijing at dzhang14@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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