China relaxes local mortgage policy as property sector struggles

According to the Ministry of Housing and Urban-Rural Development, the People’s Bank of China, and the National Administration of Financial Regulation, local city administrations would now be allowed to discard the regulation which bans individuals who had previously taken out a mortgage and fully repaid it from being considered first-time buyers in major cities.

Historically, a number of urban areas in China had enforced strict borrowing constraints on buyers with a mortgage history, even if they currently did not own any property.

As a result, the demographic often faced higher down payment demands, Bloomberg reported, dampening overall demand.

Bloomberg said that in Beijing, a first-time buyer might be required to provide a 40% down payment, but someone deemed a second-time buyer could be required to put down a staggering 80%.

The policy shift came amid rising concerns over China's real estate market, which was showing signs of deterioration.

Recent data showed a continuous decrease in house prices, with some regions recording a fall of up to 15% over the last two years.

Such declines did align with Beijing's affordability objectives, but were affecting consumer trust.

Developers were also feeling the pinch, with high-profile names including Country Garden nearing default.

Bloomberg cited a recent report from ANZ, highlighting that developers were grappling with a colossal CNY 62trn (£6.76trn) financial gap.

Another report by Goldman Sachs said property debt currently made up 48% of China’s GDP, standing at CNy 58trn, of which two-thirds represented mortgages.

“In the broader context of a slow, multi-year property sector correction, with demand unlikely to stabilise quickly or spontaneously, further waves of developer defaults, particularly among those without the firepower to withstand a protracted liquidity crunch, is likely,” said Oxford Economics lead economist Louise Loo.

“Property sector bond defaults, usually among privately-owned enterprises, have swelled over the past two years.

“Within offshore issuance, available data suggests that since 2020 around 70% of property bonds have either defaulted or entered into bond exchanges.”

Loo said trust defaults were not new either, particularly in the context of a regulatory-driven clean-up of the sector since 2018.

“The good news is that acute credit stresses relating to recent single-name failures seem to be confined to the high-yielding property sector so far, as investment grade property spreads appear relatively contained.

“We expect banking system buffers will be eroded, even if widespread bank failures are unlikely.

“Given still-high onshore bank exposures to the property sector, NPLs could conceivably rise, with margins hit at the same time by further policy easing - pressure on bank margins is in our view a core reason behind the PBoC's smaller-than-expected rate cuts.”

That, Loo noted, would ultimately undermine the ability of the banking sector to support the economy in a sustainable way in the future.

Reporting by Josh White for Sharecast.com.