Commercial loans for property development and developers' land
banks together with loans for individual house purchase have just
become harder to get. This follows new restrictions introduced by
the
, the nation's central bank.
When the news came in a central bank circular on June 13, industry
insiders said the move was aimed at reducing credit risk,
maintaining stability in the financial sector and dampening down an
overheating real estate market.
Financing real estate is part of the core business of the
commercial banks. By April 2003 they had real estate loans standing
at some 1,836 billion yuan (US$222 billion) representing no less
than 17 percent of their total lending. Mortgages added a further 9
percent to the banks' exposure at about 925 billion yuan (US$112
billion).
Real estate investment has surged dramatically in some regions
since late 2002. House prices have risen but so has the number of
empty apartments. While there is a shortage of affordable housing
many luxury dwellings can be seen lying vacant.
Recent years have seen remarkable expansion in investment in
housing. Rates of growth have far outstripped those of the economy
as a whole. Significantly the incomes of potential house purchasers
are also not growing so quickly.
Real estate investment in 2002 was up some 22 percent on the
preceding year. What's more the trend has been accelerating with
investment in the first quarter of 2003 up a staggering 35 percent
on the same period last year.
By
August 2002, some 945 million square meters of commercially built
apartment floor space were lying vacant. The figure is set to
increase as construction has continued to grow ahead of demand
since then.
Warnings against overheating in real estate have been heard since
the latter part of last year. Experts became concerned that if it
were to go unchecked, the overheating might go on to develop into a
property market bubble. Pointing to the precedent of the early
1990s they recognize the potential for a crisis affecting the whole
financial system. Japan had to watch its economic recovery being
held back as its commercial banks wrote off their bad debts.
The central bank has intervened with measures to raise both down
payments and interest rates for luxury apartments and villas and
also for second homes. The action to dampen down demand has
attracted scathing criticism from the property developers.
Statistics show that 61 percent of capital for real estate comes
from the banks. During the development phase, it would be typical
for some 20 to 30 percent of start up capital to be borrowed by the
developer. Then there are the loans for the 30 to 40 percent of
total expenditure that needs to be set aside for the costs of
construction.
Even after the developer has sold on the units and repaid these
loans the banks will still be heavily involved for the long term as
at least half of all house-buyers will have taken out a
mortgage.
Central bank intervention will directly curb the surge in real
estate borrowing and so address the problems of overheating. It
will also serve to strengthen a banking sector that now finds
itself with no choice but to improve the quality of its lending and
reduce its exposure to bad debts.
The real estate industry does not exist in a vacuum. It impacts on
a number of rapidly developing areas. The new central bank measures
have a wider role to play in helping to keep the rapid development
of the whole national economy on track.
(China.org.cn by Tang Fuchun June 27, 2003)