Monday, March 21, 2005

Stricter financial policies of housing loans to prevent bubble - China

Stricter policies for issuing housing loans, launched by the central bank Thursday, could prevent housing bubble.
China ended the favorable interest rates for private housing loans Thursday.
As of March 17, the interest rate for private housing loans rose at least 0.2 percent to approximately the same rate as other loans. At the same time, the minimum down payment in cities with rapid housing price increases was raised from 20 to 30 percent.
The move will slow the increase in housing price in major cities and discourage residents from buying second or third homes, said Zhang Xuewu, an expert with the Price Monitor Center of the State Development and Reform Commission.
Zhang made the estimates earlier this year that the housing price growth rate should return to 5 percent in 2005 due to changed financial policies, compared with the growth rate of 14.4 percent last year.
The higher interest rate and down payment will slow the growth of property prices, said Zhang.
During the past years, housing prices in major cities have risen abnormally fast. In Shanghai, many apartments witnessed 20 percent of price increase in one or two months. Apartments at a community called Oasis Garden made the record price hike of 34,000 yuan (US$4,000) per square meter this January.
The ever growing housing price turns many citizens to "smart consumers." They purchase the houses by paying 20 percent of the total fees and borrow the remaining 80 percent from the banks. Then they lease the apartment and make the monthly payment to the bank with the rent. Or they might leave the houses vacant and sell it when the price increases.
These investors helped drive the housing prices higher and higher, said Zhang.
The increased down payment will make housing speculation more difficult, said Zhang.
Wang Zhaowen, spokesman for the Bank of China said that the move will not exert much influence on ordinary citizens who buy the houses for their own use.
"It shows the effect by increasing the financial cost for housing investors in areas with fast price increase," said Wang.
China's commercial banks began to grant housing loans at favorable interest rates in 1998, expecting it -- together with auto loans and education loans for needy students -- to drive up the consumption and push economic development.
But in recent years, the private housing loans were manipulated by some investors, driving up the housing prices and accumulating the banks' financial risks. By the end of February 2005, outstanding commercial housing loans exceeded 1.65 trillion yuan ( US$200 billion), accounting for 23 percent of the commercial banks' medium and long-term loans.
"If the housing bubble burst and the borrower could not make the repayment, the commercial banks will be faced with a large amount of bad debts," said Zhang.
In the government report delivered by Premier Wen Jiabao at the just-concluded annual session of the National People's Congress, Wen said the government will strive to slow rocketing housing prices.


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