Going Online to Borrow Down Payments in China

Subsidies from developers can lower interest rates to zero
Chinese home buyers look at models of a residential property project during a real estate fair in Suzhou Photograph by Imaginechina via AP Images

Qian Kaishen and his wife almost gave up on buying a bigger home in August. When apartments went on sale at Shanghai Villa, a project they liked near the city’s Hongqiao Airport, the couple couldn’t come up with the 30 percent down payment, because most of their savings were locked up in a certificate of deposit-like investment earning 5 percent a year. Then the property agency they were working with, E-House China Holdings, offered the couple a one-year, 280,000-yuan ($45,546) loan at zero interest. It covered about half the down payment and, combined with cash they had available, gave them just enough. “Now we’re good both on our investment and home purchase plan,” says Qian, who works for a local logistics company. “We would’ve given up if it weren’t for the loan. I don’t like borrowing from my parents or relatives, especially because we have the money.”

E-House has helped more than 70 home buyers borrow almost 20 million yuan for down payments through online finance website fangjs.com, which it set up in July with Web portal operator Sina. Investors who fund the 12-month loans typically earn 7.5 percent to 8 percent. Developers who want to boost sales subsidize interest payments, keeping rates for home buyers low, and provide guarantees or deposits to protect E-House against defaults by the borrowers. E-House collects a fee of 1 percent of the loan amount from the borrower, according to Ma Weijie, its deputy chief financial officer. It caps lending for down payments at 15 percent of the price of a first home and 20 percent for a second home and lends only to owner-occupiers, not investors. China Overseas Land & Investment and Poly Real Estate Group are among 22 homebuilders that have signed with E-House to provide the service at some of their projects, Ma says.

Home prices in China have tripled since 2000. As part of the government’s efforts to curb property speculation, buyers who want to take out a mortgage are required to put down 30 percent of the purchase price for a first home and 60 percent for a second. While China’s banking regulator prohibits banks from making loans for a down payment, the country has no rules governing Internet lending. It would be hard to prevent home buyers from borrowing online, says Johnson Hu, a property analyst at CIMB Securities Research in Hong Kong. “As long as the money is in the account, you can simply say you borrowed it from a friend,” he says.

Peer-to-peer borrowers and lenders, connecting via the Internet and bypassing banks, have become a significant part of China’s $6 trillion shadow banking system. From 2011 through Sept. 30 of this year, online borrowing, for anything from weddings to medical expenses, increased fiftyfold to 64.6 billion yuan, according to wangdaizhijia.com, which tracks more than 1,000 lending sites in China. Ma estimates online property lending will rise to 20 billion yuan this year and says it has the potential to grow to about 1.2 trillion yuan a year, assuming 15 percent of home sales are financed by peer-to-peer investors.

The trend gained momentum in September when Ping An Insurance Group, China’s second-largest insurer, began offering such loans to buyers at 121 residential projects built by Shimao Property Holdings and Greenland Holdings Group. Ping An, based in Shenzhen, is ready to lend 10 billion yuan for down payments in Beijing, the same amount in Shanghai, and as much as 8 billion yuan in the southern city of Guangzhou, according to Zhuang Nuo, chief executive officer of Ping An’s real estate e-commerce unit. He says Ping An raises the money for down payment loans mainly from online investors at its peer-to-peer lending unit. Interest rates on the loans are as low as zero percent; developers subsidize the returns to investors. Ping An doesn’t charge borrowers a fee.

“Since traditional banks can’t finance down payments and aren’t doing it, can we use Internet finance to support those people?” Zhuang asks. “The default risk is not big. They see their home as a necessity.” Others say the loans are not safe because they enable unqualified borrowers to get mortgages. Borrowing from peer-to-peer websites isn’t recorded in the central bank’s credit information database, which banks rely on to get a borrower’s credit history. “The less of the homeowner’s own money is put into the payment, the more likely he or she will default” if home prices plunge, says Zhang Haiqing, a Shanghai-based research director at Centaline Group, China’s biggest property agency.

Ultimately, the people putting up money for the loans could get burned if China’s property market goes into a slump. “The pressure on the borrowers to repay the down payment in a year together with the mortgage is fairly high,” says Bei Fu, a property analyst at Standard & Poor’s based in Hong Kong. As borrowing for down payments becomes more prevalent, “investors will be bearing the brunt of the default risks when the market or economy makes a negative turn.”

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