2012-02-28

This won't end well: China goes subprime; developers extend credit to home buyers

Lower down payment to reduce supply of housing
As the real estate market tilts in the favor of buyers, property developers in Guangdong, Hubei and Anhui provinces have gone so far as to provide upfront to first-time homebuyers two-thirds of the down payments that they will need to buy residences.

"Usually, you have to pay a minimum down payment of 30 percent to buy a house for the first time," said a salesman at an apartment project in Huizhou, Guangdong province, who only provided his surname, Zhuang.

"But there will be a larger discount if you buy an apartment before the end of the month. You will only have to pay a 10 percent down payment."

Zhuang said the remaining 20 percent required for the down payment will be advanced by the developer. So long as a homebuyer pays the money back before the project is completed in March 2013, he or she will not owe interest or extra fees.

"The special offering is only for local first-time homebuyers or people who have lived in the city and paid taxes for more than a year," Zhuang said.
Easy credit! The solution to every crisis. Except for the one caused by too much credit.

Some Chinese Developers Cut Down Payments, Business News Says
Developers have fairly strong needs to boost sales under this environment,” said Zuo Hongying, a Shanghai-based analyst at AJ Securities, adding that the practice “won’t become too widespread” as delaying down payments in effect increases leverage and risk.
This policy was used in 2008 on a temporary basis, but who knows how long this will last. If the market has truly turned a corner, they will not be able to stop the policy. This also brings to mind Lucent's policy in the late 1990s of extending credit to customers. They booked sales when the goods were sold, but the cash came later. Developers, who are starving for credit themselves, are now in the business of extending credit to their customers and the result will likely be the same as it was for Lucent and other firms that use this tactic to boost sales: disaster.

One of the firms offering these types of discounts? China Merchants, discussed in Chinese real estate market on the verge of explosive price declines. Is this firm in any condition to make these offers? Consider 招商地产叫卖一成首付 暗藏购房者主动违约风险
根据招商地产去年三季度财报,该公司扣除存货的流动资产仅184亿元,却要偿还一年内到期的各项流动债务近214亿元,还款压力显然很大。
In plain English: China Merchants had ¥18.4 billion in current assets after backing out inventory (as of Q3 2011), but has to repay ¥21.4 billion in debt this year.

Other firms said they are looking very closely at income, but documentation is unreliable in China. One analyst said China Merchants is legitimate, but other firms may fake the documentation, conspiring with buyers to defraud the banks. The developers will take advantage of the plan to extend the banks credit to their customers. Which, by extension, puts the bank on the hook. If buyers break their contract, then the banks auction the home and eat the losses.

The article doesn't make clear what are the grounds and penalties for breaking a contract. If home prices fall by more than 10% and the buyer finds a better deal, it makes sense to lose the 10% down payment and buy somewhere else. Also, when the the market weakens, next in line to be defrauded will be the shareholders, after earnings of developers are restated.

Another article that gives some details on the various offers is 北京万科等房企推首付分期 最低首付5万.

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