China's Latest Problem: Surging Subprime-Housing Loans

Residential real estate is a slippery slope for China (especially when this frequently recurring bubble is in its bursting phase) . A critical problem the country is dealing with right now is the fact that it is now confronted with the realization that blind construction spending, building out ghost cities year in and year out, has resulted in a glut of vacant housing. There are two main issues China faces with an oversupply of vacant housing. First, it means that new construction has been slow, ultimately putting downward pressure on GDP.
Construction growth has plummeted from the highs of just six years ago, and that is helping put a drag on overall GDP.


The second issue, as we discussed earlier, is that real estate makes up a stunning amount of Chinese household assets. As home prices decline, so does investor and consumer confidence, which also ultimately makes its way to the real economy. In fact the impact on the average resident is far greater than when the Chinese stock bubble burst.


The solution for China has been to ease credit conditions, and relax tax laws to help kick start the housing market again. However, this has (predictably) lead to massive sub-prime loan exposure and the accompanying non-performing loans that go with that.
The ease of credit conditions resulted in mind-boggling $520 billion in new loan creation in January.


Of course, much like the US, the drive to inflate housing prices via cheap debt has created an unprecedented amount of NPL’s – NPL’s which incidentally, are eventually going to be part of debt-for-equity swap designed to hide just how insolvent banks really are.

We’d love to stop there, and leave it at your typical bank bailout discussion. Unfortunately, as the Wall Street Journal reports, the problem has become much more wide-spread than just banks.

In China, home buyers typically put down 30% of the cost of a home (as a result of a reduction in down payment requirements in late 2015 when the government decided to once again reflate the housing bubble at all costs). Sometimes, however, the funds to fund even that are unavailable, even with banks dropping helicopter type money. Where are potential buyers getting the money to complete the purchase you ask? Well, from other "investors" of course. As Chinese equities have plummeted, investors have turned to peer-to-peer lending as a way to make money.

Chinese P2P lenders loaned $143mm in January, up from roughly $47mm in July of 2015. The problem is that what these vehicles have done is successfully expose even more people to the world of soured loans in China. 

As the following chart shows, P2P lending has exploded higher in recent years.


With all that being said, China has accomplished one thing (other than record bad debt), Tier I housing prices are in fact reflated, however it appears at the expense of the lower tiered markets.


The WSJ has more

Government efforts to tackle a glut of vacant housing in China by spurring home lending have triggered a bigger problem: a surge in risky subprime-style loans that is generating alarm.


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Some economists see parallels between Beijing’s mixed messaging on the housing market and its attempts last year to first talk up a stock-market rally and then control the fallout as shares reversed direction. As a way to help support the broader economy, Chinese regulators made it easier for individuals to borrow to buy stocks, and then scrambled to rein in margin financing.


Now, a sense of déjà vu is looming over the housing market. “Having encouraged borrowing to help reduce the house glut, the government is now realizing the risks and trying to correct itself,” said China economist Zhu Chaoping at UOB Kay Hian Holdings Ltd., a Singapore-based brokerage.


Based on calculations from data from the central bank and consultancy Yingcan, lending from peer-to-peer online firms for down-payment loans made up 0.19% of new mortgage loans in 2015. But that doesn’t give the whole picture, as banks offer the loans under other labels and developers also make such loans.


China Construction Bank Corp., the largest provider of residential mortgages among Chinese lenders, said the rate of nonperforming loans in residential mortgages in 2015 was 0.31%, up from 0.21% in 2014. The bank’s overall nonperforming-loan ratio reached 1.58% last year. 


Industrywide, nonperforming loans rose to 1.67% of total loans last year from 1.25% in 2014, according to official data. But analysts estimate the true ratio this year could be 8% or more. In the U.S., 14.6% of subprime loans made in 2005 defaulted, according to the Federal Reserve Bank of Chicago. 


Outside China’s megacities, developers offer interest-free down-payment loans to entice buyers. “Our housing sales picked up last year because buyers had a lower down-payment burden to bear, and that is mainly due to us helping to pay for the down payment upfront,” said one Sichuan-based developer.


Housing Minister Chen Zhenggao in mid-March said in some small or midsize cities, rural migrants make up a third of home buyers.


Many home buyers pool the life savings of parents and in-laws to come up with the down payment, setting up for widespread economic pain if price increases fail to materialize.


"Down-payment loans are duping young people,” said Jiang Yan, a 32-year-old Shanghai resident, using a term roughly translated as “a greater fool” to describe a spiral of buyers paying irrational prices for assets in the belief they can be sold on for an even crazier price.

All of this goes back to what we wrote about one week ago in "China Tries To "Suddenly" Pop Latest Housing Bubble While Reflating Stock, Car Bubbles"

Who knows: perhaps China will be successful. Over the weekend, Suzhou, in the eastern Chinese province of Jiangsu, banned buyers from using credit cards on down payments of property purchases, according to a report in Suzhou Daily, the local-government affiliated newspaper.

Let that sink in for a second: Chinese were using credit cards to fund down payments.

The reason is that new home prices in Suzhou posted their 3rd-biggest monthly surge among 100 major Chinese cities in March, and the city was No. 2 in property-price increases for Feb. The reason why buyers had to use credit cards is because they remain unable to borrow from real-estate agencies, P2P platforms.  The paper adds that banks asked to scrutinize mortgage appliers’ marital status to prevent them securing loans through fake divorce claims, paper said.

Meanwhile, China's Uwin reported that Shanghai new home sales plunged -60.4% in the past week, with the average new home price dropping -3.4%.

Perhaps the only question is if China has indeed popped its housing bubble (again), which asset class will soar next?