Unregulated private lending inflates China’s housing market
Photo: afrilandproperties.com
Huang Ying (pseudonym) jumped from her high-rise flat, after she was asked to move out and a purchase agreement between her and the home owner was torn up because of considerable price hike in the local housing market, People’s Daily Online, a state-run media, reported at the end of June.
Huang, 46, a local resident of Hefei, the capital of eastern China’s Anhui province, had borrowed 500,000 yuan and taken on two jobs in order to purchase the house at the beginning of 2015. Unexpectedly, before her family got ownership of the house, a major market boom in tier-one and neighboring tier-two cities early this year caused panic buying. Huang and her family were forced to cancel the deal and return the house with full refund. However, after realizing that her family would never be able to buy a decent house for the same price, the woman killed herself.
The tragedy exemplifies the adverse impact of an unexpected market recovery since last May that is dubbed by industry insiders as “hitting the ceiling” and reported to be mainly fueled by easy credit and looser buying restrictions.
Expectations of cooling down
Actually, before Huang took her own life, projections were made that the red hot market in China was going to cool off gradually.
New home prices — excluding government-subsidized housing — climbed in 60 cities in May, down from 65 in April, among the 70 cities tracked by China’s National Bureau of Statistics. This June has seen average price for residential housing reach 11,816 yuan (or USD 1,776) per square meter among the 100 cities recorded, registering a monthly increase of 1.32%, down 0.38 percentage point from last month, according to a July 1 note by the China Index Academy (CIA), the largest independent property research organization in the country. “The recovery in China’s housing market that helped underpin the economy in the first half of 2016 is showing signs of tapering off,” according to a Bloomberg report.
As for Hefei, where residential price hikes had been among the highest in the country in previous months, the latest CIA report shows its monthly price rise had slid to 2.59% in June from the 5.76% surge in May.  
Li Youhuan, an industry analyst and senior professor with the Guangdong Academy of Social Sciences, told sino-us.com that there indeed is a property bubble in China, as the market movement is not rational. “It is expected that the now over-inflated prices would ultimately go down after correction,” he noted.
Private loans: a double-edged sword
From September 30, 2014, China’s central bank and the China Banking Regulatory Commission began to use a series of preferential credit and tax policies to bolster the downward market. Since then, the housing market in Shenzhen has been looking up and some popular places in the financial center in southern China have even witnessed a 90% increase. Since early 2015, housing prices in China are up an average 11%, with tier-one cities such as Beijing, Shanghai and Shenzhen leading the gain with a 30% surge during the period. Earlier this year, the boom spread to some slightly smaller, tier-two cities including Hefei, after the government became concerned about surging prices in big cities and resumed strict policies to cool off the market.
According to Li, multiple reasons are behind the rebound. “Easing monetary policies have directed large amounts of money into the market, and the ensuing boost in sentiment is draining more out of China’s gloomy real economy,” he said, noting looser policies have also helped China’s unregulated shadow banking move into the market that previously boasted strict, government regulated lending controls. 
“What perhaps makes the recent boom in China’s housing market appear different than the ones that preceded it is the rise of private lending which subverts China’s highly regulated banking system,” wrote Wade Shepard in a Forbes article. According to him, an estimated $277 million has been acquired for housing via these under-regulated lenders over the past year in Beijing, while in Shenzhen that number is estimated to be at $306 million.
It is known to many industry insiders that more buyers in China are even turning to developers, small loan companies, real estate brokerage firms and other peer-to-peer lenders for financing their down payments.
Shenzhen, being China’s financial center, has given birth to a burgeoning Internet finance industry. There, developers and real estate brokers were working with peer-to-peer lending platforms to provide down payment loans. It is widely reported by the Chinese media that after Shenzhen’s booming success, cities like Beijing and Hefei followed suit to use riskier loans for spurring the market.
Bai Yang, Beijing general manager of wdzj.com, a major P2P platform in China, denied that his company has similar products but agreed the malpractices did stimulate the market by lowering the threshold for potential home buyers.
“Homelink (Lianjia), a top real estate broker was exposed by the media for helping home buyers finance down payments through its own online lending platform and thus suspended the business amid storms of negative comments,” he told sino-us.com.
Shepard commented in his article that these private loans essentially grease the handholds of the government’s grip on the housing market, while lessening the effectiveness of one of its major safety nets: home buyers’ traditional lack of leverage.
“If people would borrow to pay the minimum 20% or 30% down payments, there is a big chance that he would give up on the property once the market goes down,” explained Bai, adding that the policy makers have become vigilant about default risks that may threaten financial stability in the housing market. Central bank Governor Zhou Xiaochuan alerted in March that unauthorized loans by real-estate agents increase the chance of bad debts.
Meanwhile, officials of related departments were quoted during China’s “two sessions” as saying that they would crack down on down-payment loans, a malpractice that has evaded existing credit policies.
Li said China’s central government also promised to roll out detailed restrictions to regulate P2P lenders, although he is concerned some government organs have long been paralyzed by rigid management with no flexibility and so could not work out effective counter measures. “Even if workable rules and regulations were in place, malpractices would emerge in more deceptive ways soon and fail those strong-headed government officials.
It was reported recently by several financial media that after Chinese regulators were distracted by other priorities, some private lenders once again braved to finance down payments in the disguise of consumer credit or mortgage-backed securities.
The silver lining is, according to Bai, that only a small percentage of property buyers are seeking to finance down payments considering more common arrangement in China would be to “borrow” from your parents or parents-in-law. 

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