Chinese Mortgage Market

Introduction

The Chinese property market is at high risk for a property bubble.  China’s once booming market is on the verge of a slump, despite government efforts to cool down housing prices.  Currently, house prices are decelerating sharply, property demand is decreasing, construction activity is falling rapidly, and all the while mortgage defaults are increasing. When looking at annual statistics, average new home prices in 2014 were up by 4.72%; but it is the monthly and quarterly figures that are worrying experts.  Out of 100 cities surveyed, 76 saw house prices falling monthly. Due to the decrease in housing prices, there has been an increasing number of households and corporations defaulting on mortgages.  According to the Global Property Guide, “The majority of defaults have been corporations that bought projects and homes at inflated prices financed completely by bank loans, with no equity.” In an effort to boost demand, the Chinese government has cut back on property market control and reserve requirements for small banks in order to encourage lending.  Several of China’s provinces, including Fujian and Sichuan have offered tax incentives or subsidized mortgages to promote home purchases.

Purchasing Property in China

If one is not familiar with Chinese Real Estate System, it is important to hire a lawyer. There is no private ownership of land in China.  One can only obtain the rights to use the land.  For residential purposes, a land lease for up to 70 years is typically granted.

Land Purpose

Years of Grant

Residential Purposes

70

Industrial Purposes

50

Purposes of Educational, Scientific and Technological, Cultural,Health Care or Sports

50

Commercial, Tourism or Recreational Purposes

40

Combined Usage or Other Purposes

50

   Table 1: Duration of Chinese Land Rights

Foreigners who have worked or studied in China for at least a year are allowed to buy a home.  These candidates go through supervision procedures before they are allowed to buy properties in designated areas. Foreigners cannot act as landlords and property ownership for investment by foreign companies and individuals are prohibited.  However, Chinese citizens living overseas and residents of Hong Kong, as well as Macau, are exempt from these restrictions.

After a property has been chose, a down payment must be made along with the signing of a contract known as a “Beijing Commodity Housing Purchase Offer.”  The down payment is usually 30% of the purchase price.  After registering the contract, the remaining balance must be paid off.  There are three procedures to register property, which can take around 30 days to complete. The property acceptance, title transfer, and obtainment of the title certificate come consequently.

There are several costs incurred by the buyer when purchasing a Chinese home.  There is a flat rate Deed tax (3%), a transfer fee levied by the local real estate bureau (.5%), a Stamp tax paid by both the buyer and seller for property transfer documents (.05%), and a real estate agent’s fee, which is negotiable.

Chinese Property Financing Options

In China, property financing is quite difficult to grasp.  Chinese banks are controlled by the Chinese government, and often instructed to implement lending policies that will further political agendas. 

Different lenders offer different options in regard to requirements for loan application.  While housing loan interest rates in China are set forth by the People’s Bank of China, it is still important to weigh options

Personal New Housing Loan

This type of loan is given to first-time home buyers that are Chinese citizens, residents of Hong Kong or Macau, or foreign citizens with right of abode in China.  The majority of lenders expect borrowers to provide at least 20% of the funds required. Personal home loan interest rates will be set in line with the commercial loan interest rate at the same level and floats within the scope that is required by the People’s Bank of China and the China Banking Regulatory Commission. The loan period cannot exceed 30 years.

Personal Second-hand Housing Loan

A personal second-hand housing loan is a loan given to someone who is planning to purchase a home that was previously owned.  This type of loan carries all the benefits of a personal new housing loan.  There is a 30 year age limit on the second-hand residence, but this can differ from lender to lender.  Interest rates are aligned with those set forth by the People’s Bank of China.

Personal Housing Provident Fund (Portfolio) Loan

A personal housing portfolio loan is a commercial loan released to the borrower to make up the shortfall in case the provident fund loan applied is not sufficient for paying the house price. The loan term and interest rate follows the rate set by the local provident fund management center.

 

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