There are concerns among some market participants that potential crisis may arise from property bubbles in some first and second-tier cities. The real estate sector is one of the key areas where multiple authorities prevent and control its risks. Experts analyze that a serious of short and long-term policies will be introduced, and the restriction on the industry will not relax in the short run. In a long-term view, as measures on the land system reform, the governance of megacity and the construction of multi-level housing supply system construction will be introduced, the real estate industry will achieve a soft landing.
Higher leverage brings risks
Yang Rong, chief banking analyst with China Securities, believed that property bubbles in the first and second-tier cities are the most urgent financial risks. Compared with other financial risks, such as excessive leverage in the bond market, risks in banks’ off-balance sheet business and high leverage in wealth management business, priority should be given to the prevention and control of property bubbles.
Historical experience shows that the burst of property bubbles will seriously damage the real economy. International financial crises, including the US stock market crash in 1987, the Asian financial crisis in 1997 and the US subprime mortgage crisis in 2007, reflect that financial risks may have negative impacts on the real economy.
In the case of China, Zeng Gang, bank research director of the Chinese Academy of Social Sciences IFB, believed that since the third quarter of last year, signs have shown that the economy is stabilizing, but there is uncertainties that whether the trend will continue. If property bubbles continue to expand, it will bring risks not only to the financial sector but also to the nation’s development strategies. Costs in the real economy will rise further. Capital in the financial system is further diverted. This will be harmful for economic development. A fast growth in housing price is not conductive to the transformation of economic structure, and will bring crowding-out effect to credits in the manufacturing industry and small businesses. Meanwhile, a fast growth in household leverage will bring lots of risks
Although the household leverage in China is not high, its rapid growth since 2016 has brought great risks. Liu Yuanchun, vice-president of the Renmin University of China and executive director of the National Development and Strategic Research Institute, Renmin University of China, said that in terms of house mortgage growth, the rapid expansion in household debt can be hardly to sustain. Data from the National Institute of Finance and Development (NIFD) shows that the leverage in the household sector has grown fast in the last two years, and the leverage ratio rose by nearly 5 percentage points in 2016. In terms of scale, the household debt in 2016 increased by more than 6 trillion yuan over the previous year.
Zhang Xiaojing, deputy director of the NIFD and director of the Center of the National Balance Sheet Studies, pointed out that the fast growth of household leverage brings large risks. Although the household debt in China is relatively low compared with its GDP, its proportion to household net wealth is very high considering that the proportion of net household wealth to the society’s total net wealth is 40-50 percent, much lower than the 70-90 percent in developed economies.
In addition, some other hidden leverages are worthy of vigilance. Wen Bin, chief researcher from Minsheng Bank, said that loans in down payment and fake mortgage are also increasing leverage in disguise, which may also cause risks. Although it will not trigger systemic risk, it is necessary to guard against risk spillovers.
Jiang Chao, chief economist with Haitong Securities, believed that the current round of hike in housing prices is mainly because that money supply now grows at a record high space. However if the deleverage in the financial sector continues, the growth in international financing will slow down. A risk in mortgage interest rates will weigh on demands for house mortgage. As a result, the growth of the broad money, represented by banks’ total liability, will slow. Property bubbles will be hard to maintain.
Guard against risk spillover
Regulatory authorities have long been aware of risks in property bubbles. On April 7, the China Banking Regulatory Commission (CBRC) stressed that the banking financial institutions should firmly grasp the residential property of houses, implement different policies in different cities and differentiate policies for housing credit. It also strictly forbids the illegal inflow of capital into the real estate market, crack down on borrowing for down payment and curb property bubbles in hotspot cities.
An employee for the central bank told China Securities Journal that regulatory authorities are worried that some 70 percent or even 100 percent of new loans in some commercial banks last year were individual house mortgage loans, which has serious term mismatch with the capital supply of commercial banks and will bring large potential risks. Once the market liquidity tightens or house prices decline, the risk will spread to the financial system.
Bank of Communications chief economist Lian Ping said that as the source of new capital is limited, the real estate industry may face financing pressure this year and will inevitably see a consolidation within the industry. In the process, some small and middle-size house enterprises with high debt ration may face certain risks.
Regulators have taken various measures to curb the rapid rise in leverage in the housing market.
Zhou Xuedong, head of the Business Management Department of the Central Bank, said that the proportion of individual house loans to the entire new loans is expected to fell to below 30 percent this year, a remarkable decline from the proportion of around 45 percent last year.
Wen Bin expected that banks will resolutely implement the macro-control policies on the real estate market this year. In terms of the total amount of loans, the proportion of new mortgage loans to all new loans should stably fall to a reasonable range from last year. In terms of structure, banks will continue to increase credits support for rigid demands for houses. In terms of regions, banks will encourage demand for renovated houses in third and fourth-tier cities.
Establish long-term regulatory mechanism
Recently there have been intensive regulatory measures introduced into the real estate market, reflecting that relevant authorities have attached great importance on the prevention of property bubbles. It is noteworthy that in addition to regulatory measures taken to cities that see rapid growth in housing prices, there are also polices ready for cities that could be a potential target of speculation. For example, when the central government announced the establishment of the Xiongan New Area, it also issued a serious of strict measures to control speculations in the land and real estate market so that speculators may not take advantage of it.
A number of experts told the China Securities Journal reporter that the biggest difference between the current round of real estate market regulatory measures and the past measures lies that the current measures are proactive. And these measures include policies on credit and land and strengthen the expected management. The real estate market will achieve a soft landing.
Shen Jianguang, managing director and chief economist from Mizuho Securities Asia, said that the marginal effects of house-purchasing restrictions are weakening. In order to curb bubbles in the real estate market, it should further promote the supply side reform, land reform, household registration reform and tax reform, and establish a long-term regulatory mechanism.
At present, long-term measures are under preparation. Jiang Daming, Minister of Land and Resources, recently said that the minister will strive to connect all registration information on real estate in all cities and counties around the country into a national platform before the year end.
Analysts said that the a unified registration of real estate will provide a more adequate basis and basic information for the real estate tax and give a more effective support for the real estate tax reform. Zhu Ning, vice president of the National Finance Research Institute of Tsinghua University, believed that to levy taxes for holding of real estate will not only curb the demands for speculative investment in the real estate sector but also provide a stable and sustainable source of revenue for local governments.