According to property agency Zillow.com, by the time that the subprime mortgage crisis peaked in the United States, $9 trillion had been wiped off the value of American homes. By the end of 2010, 23.1% of American homeowners were also in negative equity – that’s 11.1 million households – and a million people had seen their homes repossessed.
The city of Wenzhou in China is also grappling with a property crisis. Official data suggests that home prices in the city have fallen year-on-year for 23 consecutive months since September 2011. Worse, the city is now having to deal with a tide of foreclosures.
“Wenzhou’s housing market is not so good now,” a property agent told the South China Morning Post, with commendable understatement. “Home prices have plummeted by about 60% since 2010. No one wants to buy flats when their prices are declining. Everyone is just watching the market.”
Wenzhou, an entrepreneurial hub in coastal Zhejiang province, is home to some notoriously speculative locals. When the central government imposed a series of measures to cool the property market two years ago, it was harder hit than most. Speculators rushed to sell as prices started to fall and new supply was soon being mothballed. New projects have continued to decline in number, dropping about 40% from a year ago. Some developers have abandoned projects before they were completed, says CBN.
Of further concern, property prices in Wenzhou have declined so sharply that market values have often fallen below the amount of their corresponding loans, resulting in negative equity, says Securities Times.
Take Lucheng Plaza. The residential development was fetching Rmb100,000 ($16,346) per square metre in 2011 but recent transactions show the price has dropped to Rmb32,800. Reductions in value are still failing to generate much market interest in general: “For expensive projects, even if you cut the price it is still difficult to sell,” says Chen Yongfeng, the deputy chairman of the Wenzhou Real Estate Developers Association.
Traditionally, many property owners in China purchase in cash, which means that will avoid the worst of the negative equity scenartios. But in Wenzhou investors are famously aggressive, with many using leverage to boost returns. Many have borrowed to buy, including taking loans from private or underground lenders. According to the city’s Small Business Association, about 60% of private loans went into the property market between 2008 and 2010. Some speculators have decided to disappear rather than pay off their housing loan. That then sparked a chain reaction which led to private lenders collapsing.
The banks may also be exposed. “At that time, the mortgage business was increasingly competitive. So in order to gain more market share, some commercial banks lowered their lending standards and relaxed their evaluation procedures. This has impacted the safety of the banks’ assets,” says Securities Times.
Some borrowers have declared bankruptcy, letting creditors repossess their assets rather than continue to pay their mortgages. As a result, the number of foreclosed homes has been rising. A housing official in Wenzhou told CBN that the courts have processed over 3,000 cases of foreclosure since 2011 and the number of repossessed homes so far this year is triple the amount for the entirety of 2011.
Under Chinese law, if the sale price of the property is insufficent to cover the outstanding liability on the mortgage, the bank is entitled to demand that the mortgagee pay off the shortfall.
“Recently auction prices have very often come in lower than the remaining amount on the mortgage,” says the Wenzhou housing official. “Many people found that even selling the house meant that they still can’t repay the bank loans.”
In March 2011, restrictions were imposed barring buyers from purchasing two properties as part of a nationwide campaign to calm property prices, says Xinhua. This ban has now been lifted in Wenzhou. The hope: richer residents will return to the market, a move that might give prices a boost.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.