Photographer: Tomohiro Ohsumi/Bloomberg

China's Big-City Homeowners in Austerity Mode Are Weighing on Retail

  • Big mortgages, big down payments zap spending in big cities
  • Beijing service sector corporate profits tumbled 11% in 2016

Last December, Li Qinglei and his wife purchased a 114-square-meter home in western Beijing by taking out a 5.5 million yuan ($800,000) home loan and borrowing more than 1 million yuan from family and friends. 

Then, they shifted into full-on austerity mode.

Travel plans have been put on ice and eating out, even at inexpensive restaurants, is now a rare luxury. "In the past, we took cabs a lot. Now, we are more likely to take a bus or a bike just to save money," said Li, a 34-year-old bank manager. "One night, my wife was cleaning up the wardrobe, grumbling that she hasn’t had any new clothes, and then she said, ‘That’s OK, we must watch the money closely.’" 

China’s overheated housing market isn’t just a risk for the banking sector. It’s also a potential drag on growth, as more and more disposable income is diverted to meeting monthly mortgage payments -- or coming up with the typical 30 percent to 35 percent down payment now required by lenders to secure a mortgage.

That means that new homeowners like Li are keeping discretionary spending tight just when China is trying to shift to a consumption-driven economy.

The trend may already be visible in large cities like Beijing and Shanghai, where property markets are in overdrive. Total retail sales growth rates in both cities dropped to a multi-year low in 2016, whereas property prices rose by more than 20 percent from the previous year. 

Serious Cash

Service sector corporate profits in Beijing fell 11.3 percent in 2016 from a year ago, led by the culture, sports and entertainment category that posted a 24.4 percent drop in profits. In Shanghai, the services sector in total reported a slim profit gain of 1.4 percent in 2016 versus the previous year, but those same consumer-sensitive industries experienced an alarming 57 percent plunge in profits.

Still, national retail-sales growth remained robust at 10.4 percent in 2016, and advanced 9.5 percent in the first two months of this year; global companies like Starbucks Corp. and Danone SA are still expanding in the world’s most populous market. But the rising home prices are posing a threat as they burn through consumers’ cash.

To understand why consider this: It now takes about 17 times the annual income of the typical household in Beijing, Shanghai, Shenzhen and Guangzhou to buy a home in their cities, according to an estimate by UBS Group AG economists led by Hong Kong-based Wang Tao published in a Feb. 9 report. In most developed economies, the comparable time period is four to six years, UBS said.

Payroll gains haven’t kept up with the property price surge. In Beijing, average home prices jumped 32.6 percent in 2016, whereas average personal disposable income rose by 8.4 percent. For young and middle-aged families, it’s hard to buy a home without becoming heavily indebted.

High property prices may make people look wealthier on paper, but the debt burden is holding back spending, said Jacqueline Rong, an analyst at BNP Paribas SA in Beijing. "Mortgages and debts would suck up a large share of many home buyers’ income and savings, leaving less room for other expenses."

Chinese home-owners are also less likely to leverage the market value of their homes as collateral for home equity loans to fund consumption like their peers in the U.S. or other developed economies. That’s why in China, higher home costs tend to weigh heavily on household spending, she said.

In China, home ownership is a point of pride and seen as a must-have for some young families. Li decided to sell his former apartment and traded up to his new home mainly to help his 5-year-old son get access to a better elementary school.

Robust Demand

As a result, housing demand remains robust. The share of households planning to buy a home in the next quarter has jumped to 22.9 percent, the highest since data was first collected in 2010, according to the latest People’s Bank of China survey of urban dwellers.

Aspiring homeowner Eddie Chao, 31, who works for a state-owned company, keeps a tally of every yuan he spends. He has set a strict monthly budget of 5,000 yuan, including 3,000 yuan for rent. He bikes often and only buys discounted movie tickets under 20 yuan. He seldom ventures out to a cafe. 

Last year, he finally gathered enough for a down payment, but the seller decided to hike the price at the last minute. Chao walked away from the deal and treated himself to a trip to Japan instead. But this year, he said, he returned to his old, thrifty lifestyle.

"I don’t think I can buy one any time soon given the current prices. Yet there is nothing else I can do other than saving money. I often feel very insecure," Chao said. "And the property prices largely contributed to that insecurity."

Chinese policy makers have tried to cool the property market, where last year 45 percent of new loans last year went to mortgages. In mid-March, the central bank tightened credit conditions and raised the rates it charges in open-market operations and on its medium-term lending facility, which also pushed up the borrowing costs for home buyers.

Authorities in several cities have rolled out restrictions since September to keep a lid on the froth. Last week, Beijing’s municipal government imposed more restrictions on home buyers in an attempt to ease prices, which have resumed climbing after a brief drop late last year. A dozen other cities have also stepped up curbs over the past two weeks.

On Friday, mortgage lending rules in Beijing were tightened again. Banks were asked to scrutinize home loans to newly divorced couples, as some resorted to divorces to apply for lower first-home down payments as single buyers. Home buyers divorced for less than a year will be considered second-home buyers when they apply for mortgage loans, which acquires down payments between 60 percent and 80 percent, the Beijing branch of the People’s Bank of China said in a statement Friday.

Despite the curbs, Li still believes Beijing prices will keep rising and he said that the financial sacrifices he’s making to live his "metropolitan dream" are worth it. "We are the ‘fake’ middle class," he said. "Of course we feel worried about the high property prices."

— With assistance by Miao Han, and Emma Dong

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