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Your Three Minutes In China Bank Mortgages: Risks To Rise In Lower-Tier Cities

Recent measures to fix China's property slump may hit some lenders.  We believe a relaxation of downpayment requirements will temporarily increase demand for mortgages. That could stress some banks if housing prices continue to fall.

What's happening

The Chinese government is trying to revive the country's moribund property market.  The People's Bank of China (PBOC) announced on May 17, 2024, that it would cut the downpayment requirement on mortgages for first-time homebuyers by five percentage points, to 15%.

The PBOC also removed a lower limit on mortgage rates, opening the door to cutting banks' interest charges.

Why it matters

Boosted demand for mortgages could strain banks focused on lower-tier cities.  We expect property prices to decline about 14% over 2024-2025 in tier-three cities (see table 1). Given that first-time homebuyers now only have to make a 15% downpayment, they could plausibly be pushed into negative equity if prices continue to fall in the third year of ownership. That may trigger some who have multiple "first homes" to walk away from their units, and default.

Table 1

Home prices are getting hit hardest in lower-tier cities
Year on year change
(%) 2022 2023 2024e 2025e
Primary housing prices (3) 6 (6) (2)
Tier 1 (2) 0
Tier 2 (5) 0
Tier 3 (9) (5)
Secondary residential housing prices (70 cities) (4) (4) (5) 0
Area sold (primary housing) (24) (18) (9) 0
e--Estimated. Sources: S&P Global Ratings, National Bureau of Statistics of China.

Banks would then be left holding onto houses that are worth less than the mortgage loans.  The removal of the floor on mortgage rates will also give lenders less buffer to absorb potential losses when defaults do happen. Banks would have to incur additional costs to pursue defaulters' other assets to mitigate the losses in such cases.

We do not view the emerging risks as a ratings matter.  All the banks we rate do most of their mortgage lending in tier-one and tier-two cities, where we project property prices to stabilize in 2025. However, we do believe the new measures could stress the health of banks in lower-tier cities, if they push hard into mortgage loans with a 15% downpayment.

What comes next

Much will depend on the success of the policies to reinvigorate demand, and prices.  If the new measures work, then China's property market may finally find its bottom, including in the laggardly tier-three and tier-four markets. This assumes that homebuyer confidence, policy support, and government coordination improve.

A stabilization or even an upturn in home prices would encourage homebuyers to keep their units, and stay current on their mortgages. In so saying, we note that:

  • Homebuyers' confidence in the delivery of pre-sold units remains soft;
  • China's housing market remains oversupplied, particularly in the lower-tier cities;
  • In August 2023, the government cut downpayment guidance on first-time purchases of homes to 20% of the cost of the unit; the step successfully stabilized sales, but only for a few months.

Mortgage loan performance typically has a stronger link to household income than to the property price.  Banks also have recourse to the borrowers when the foreclosure of the borrower's property is not adequate to repay a mortgage.

If home prices fall through the 15% threshold, pulling people into negative equity, borrowers with multiple first homes in this scenario would have a greater incentive to halt their mortgage payments. This would be particularly the case if they had less confidence in their income or job prospects.

Writer: Jasper Moiseiwitsch

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Ming Tan, CFA, Singapore + 65 6216 1095;
ming.tan@spglobal.com
Secondary Contact:Ryan Tsang, CFA, Hong Kong + 852 2533 3532;
ryan.tsang@spglobal.com

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