Chinese Home Buyers Walk Away

You may have read about the growing phenomenon of "walking away" in the U.S., where underwater homeowners (who owe a lot more than their house is worth) default on their mortgage and let the bank take the house. This isn't a good strategy in all states, since some allow the banks to go after homeowners for the difference between the mortgage and the home. But where banks cannot go after the homeowner, it means that many people are able to get out from high mortgage payments and rent a very similar house, sometimes on the same street, for far less money.

In China, a different situation has developed. Due to recent changes in home finance regulations, some Chinese buyers are starting to walk away from their deposits on purchase agreements.
Buyers defaulting on price-fall fears (subscription required)

The exodus of buyers that has followed could see deal volumes in the secondary market tumble 50 per cent this week, said estate agents, while prices could fall up to 20 per cent.

"These are the most draconian measures I have ever seen. The unexpected shutdown of credit for some buyers immediately drove them away from the market," said Kenneth Pak Kei-yuen, senior general manager in the Beijing office of Midland. "We have no business today and more and more buyers are talking about walking away from deals they have already signed."

A client who had agreed to buy a 60 sqmetre apartment for 1.2 million yuan and put down an initial deposit of 50,000 yuan two weeks ago had already defaulted, he said. "After the tightening of the mortgage conditions, she decided to cancel the deal because she was worried that prices would decline."

Although the State Council's announcement did not include a start date for the new policy measures, banks had reacted immediately by freezing all uncompleted mortgage applications, Pak said. "Buyers who had just agreed to purchase homes in the past two weeks are now in panic because they worry they will have to fork out extra money as banks have also lowered loan-to-value ratios when granting mortgages," he said.

Some buyers are hanging on though, because they basically believe this is a head fake and that the bubble will continue to blow. Meanwhile, Caing reports: Gradual Wind-Down for Economic Stimulus

Brakes on new construction were applied with particular force in recent months as central and local governments sought to reduce overheating risks. For the first three months this year, total investment for new construction projects jumped more than 34 percent to about 300 trillion yuan. But the quarter-on-quarter growth rate for the same period last year topped 87 percent.

Following last year's peak for government-supported construction projects, this year's nationwide investment is slated to shift from "active expansion" to "passive continuation," which will still demand considerable capital. The 153,700 stimulus-financed projects under way in the first quarter represented a total 2.79 billion yuan in investment – an increase of 30.4 percent compared to the same period last year.

Yet the investment curve started turning downward with a slowdown in the pace of central government spending initiated by the National Development and Reform Commission (NDRC).
NDRC has yet to release details on the slowdown in central government investment. It's only public information released so far concerned the allocation of about 2.2 billion yuan from the central government for 10 energy-saving projects as part of the 11th Five-Year Plan.

Caixin learned from several local NDRC branches that, since the end of March, the agency has invested in a variety of civilian infrastructure projects including low-rent housing, water control projects, wastewater treatment and refuse processing facilities.

For example, a Gansu Province NDRC official told Caixin that the central government allocated 1.3 billion yuan for construction of low-rent housing in his province. The investment level and the construction scale are expected to rise this year, although the official added that "there will be no central government investment in other fields."

My hunch is that renminbi revaluation is unlikely to be tossed into this stew of policy action, unless the government is planning a simultaneous strategy with the property, stimulus and currency policies. Instead, the government may wait to see the impact, which could be relatively quick in the property market, and only then revalue the currency.

And then there's the IMF's view—no bubble.