The rapid development of the Chinese housing market has increased the financial burden on urban households, and has exposed the national banking system to higher risks of a property bubble. To see off the pressure of potential foreclosures and even a financial crisis brought by the country’s growing housing bubble[A1] , a series of policies were enacted last year to make it harder for house buyers to take out mortgages.
To gain a fuller idea of the debts facing the country’s homebuyers, the China Household Finance Survey and Research Center (CHFS), which I led[A2] while at the Southwestern University of Finance and Economics, undertook sample surveys on household gearing ratios [A3] across the country based on detailed knowledge of their income versus housing[A4] . Our goal is[A5] to see how healthy the mortgage market is and how sustainable it is for families to service their mortgage repayments. From data collected on tens of thousands of field trips, we’ve identified the proportion of the population most likely to default on their mortgages, and what the impact of those defaults might be.
Outstanding mortgage loans in China more than doubled from a national total [A6] of 7.3 trillion yuan ($1.07 trillion) at the end of 2011 to 16.6 trillion yuan by the first half of 2016. [A7] Growth was particularly strong in the second half of 2014 when the government eased its controls on housing purchases. More mortgages were given as the domestic property market staged a strong comeback [A8] in 2015.
According to CHFS data, the proportion of Chinese families with the need to service mortgages rose from just 6.9 percent in 2011 to 9.4 percent by 2015 — a trend inconsistent with mortgage growth over the same period.[A9] We see three reasons for this discrepancy: first, there has been a sharp increase in housing prices; second, higher leverage ratio for housing bought with more loans and less down payment[A10] ; and third, households with existing mortgages have started taking out additional mortgages. [A11]
Starting from the second half of 2014, the government began to relax policy regulations on the housing market’s credit infrastructure. This included softer mortgage controls on second-time homebuyers, lower interest rates, and lower down payments, all of which geared the market toward rapid growth. According to a survey[A12] by Shanghai-based firm Haitong Securities, the proportion of mortgage-backed housing sales to total property market transactions [A13] grew from 19 percent in 2011 to 39 percent in 2015, as new homes sold in recent years went substantially up in their gearing ratio[A14] .
CHFS data shows that around 30 million Chinese households were servicing mortgage loans in 2011. By 2013, their mortgage debts totaled 8 trillion yuan, an increase of 600 billion yuan from 2011. As a comparison, China’s total outstanding mortgage debts increased by 2.48 trillion yuan during the same period. In other words, households taking mortgage loans for the first time generated 1.8 trillion yuan mortgage debts in the two years. [A15]
Put the 2013-15 national mortgage debt growth in the same perspective, we found families indebted in housing mortgage in 2013 borrowed another 2.8 trillion yuan in 2014-15, while first time borrowers registered 1.6 trillion yuan. [A16] In that light, we found that families taking out another mortgage on top of their primary one was the main engine for the recent spate of mortgage growth. Another way to look at the data is that from 2011 to 2013, households with multiple mortgages contributed 25% to that period’s outstanding mortgage balance increase while between 2013 and 2015, they contributed 66% of that growth.[A17] Basically, in the recent three years, two-thirds of new mortgage loans were not issued to first-time homebuyers.
Some key questions emerge from these trends. If individual households are facing higher mortgage ratios and heavier debts, will this jeopardize mortgage safety in China? Will it lead to more mortgage defaults? To answer these questions, we need to look at the solvency of households with outstanding loans.
Our team places Chinese households into five income groups: low, mid-to-low, middle, mid-to-high, and high. Low and mid-to-low income groups have limited purchasing power and are generally unable to afford mortgages. Yet mid-to-high earners are finding it easier and easier to secure credit loans. That’s especially true in the high-income bracket: From 2013 to 2015, this group accounted for 66 percent of mortgage loans[A18] issued in China, while families from the mid-to-high income group accounted for just 17 percent.
[A19] That ratio, the lower the better, was below 0.25 for the high-income group. High earners are the main stabilizers keeping mortgage loans secure [A20] in China. Households in this group get large proportions of mortgage loans [A21] and still have enough disposable income to be comfortable[A22] — even though some high-income families still owe a considerable amount on other loans and therefore run the risk of defaulting.
The most at-risk are mortgage-bearing households from the low and medium-low income groups. Our data indicates that 7.8 percent [A23] of mortgage-bearing households in China — predominantly from the low-income groups — face the true danger of defaulting on their mortgage loans. Of this number, less than 7 percent can rely on existing financial assets to service their mortgage debts, while the remaining 93 percent must urgently find new sources of income. Of that segment[A24] , 70 percent of them do not have enough money to keep up with their repayments for more than a year.
It’s fair to say that 7.8 percent of loan-servicing households representing 6.5% of housing mortgage now outstanding in China risks defaulting[A25] , and much of that risk will come true in a year.[A26]
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