Property

Flat unaffordable

Expert predicts surge in personal bankruptcies

Dream homes at fantasy prices

Wang Ling, a 29 year-old white collar worker from Beijing’s Dongcheng district, and his wife bought a 60 square metre (642 square feet) apartment in March this year. The two now pay close to Rmb5,000 a month in housing loans.

That means the money is a little tight. “I earn Rmb3,800 and my wife earns Rmb3,500 per month. We have to cut a lot of spending on shopping and travel,” Wang told the China Daily.

The Wangs are one of the mortgage slaves, or fangnu, couples spending the majority of their incomes on hefty home repayments. According to the Economic Information Daily, seven out of 10 families surveyed in Beijing and Shanghai spend half of their income on home loans.

The standard measure of housing affordability compares average house prices with average household incomes.

In most Chinese cities, the house-price-to-income ratio has been well above eight for years. A ratio of more than four sounds alarm bells in many wealthier countries; other Asian countries prices are typically rated at 5-7 times income.

Experts are now worried that Chinese homebuyers are biting off more than they can chew.

No more than 25% of household income should be spent servicing a mortgage, says the Chinese Academy of Social Sciences.

The danger? If the consumer price index (a measure estimating inflation) rises 3%, families using 50% of their income to repay home loans will find themselves increasingly living beyond their means.

Worse, if the central bank raises the loan interest rate by 2%, most of the mortgage borrowers will end up defaulting, a scenario not too dissimilar to the experience of many US subprime homeowners, says Niu Dao, a popular economic commentator.

Yet, despite the affordability issues, China’s housing market continues to roar upwards.

House sales in the first half of this year matched the frenzied buying of 2007 and property prices in 70 large and medium-sized cities were up 3.9% in October from a year earlier, the fastest growth rate this year and the fifth month in a row prices have gone up.

This is a property bubble inflating far too fast? Many seem to think so.

Recently Zhang Xin, chief executive of SOHO China and one of the country’s highest profile, told the Financial Times that a bubble was developing. China’s credit-driven stimulus programme has pumped up prices.

“Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment,” says Zhang.

“The rising prices are a direct result of so much money coming from the banks. The Chinese banks should be very worried.”

Zhang is not alone in his concerns. Fan Gang, a central bank advisor, recently told property developers at a conference that while the Chinese property market isn’t quite “crazy,” there is plenty of evidence of excessive speculation.

Rising prices have sparked anger among potential homebuyers, some of whom blame the government for giving wealthy speculators free rein. The majority of urban residents are finding it increasingly difficult to get onto the ladder at such stretched affordability levels.

So in an effort to clamp down on some of the speculation, Beijing is now reversing some of the measures taken a year ago (taken then to stoke up the market). Tax breaks, low interest rates and small down-payment requirements are being revisited. Banks are being told to pull back on some of their real estate lending.

In the meantime, Niu urges homeowners like the Wangs to trade down to smaller apartments. Or even to sell up and hold cash. Eventually this bubble will burst too.


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