PBoC governor Zhou Xiaochuan thought about it, and decided it’s probably not a good idea for borrowers to get P2P loans for down payments on homes.
In fact, he said last weekend, it’s illegal: “Funds used for down payments cannot be borrowed."
Vice-governor Pan Gongsheng, one of Zhou’s deputies, echoed his sentiments. “Property agencies and developers are not qualified to conduct financial business. They are illegally doing financial business,” he explained. “This business they are engaged in, and jointly with peer-to-peer lenders and down payment credit firms, has not only raised the leverage of residents’ house purchases, worn down the effectiveness of macro policy controls and added to financial risks, but has also increased risk in the property market."
Now you might think that what’s implied there is too bad to be true - even in the increasingly ludicrous world of P2P and marketplace lending. But in fact, P2P lenders in China have indeed been funding down payments on homes, embedding an enormous amount of excess leverage into the market while simultaneously driving up prices in Tier-1 cities.
“Home sales in Beijing, Shanghai, Guangzhou and Shenzhen, China's ‘first-tier’ cities, grew 14% last year compared with about 7% nationwide,” FT reports. “In Shenzhen, the average price per square meter in February increased by about 50% compared with a year earlier, according to Soufun, a real estate consultancy.”
Theoretically, this shouldn’t be happening. Although Beijing has gradually relaxed the rules on down payment requirements for both first- and second-homes in an effort to boost the economy, FT reminds us that "in the wake of the collapse of the US housing market in 2008, China launched restrictions on mortgages to rein in the country’s then red hot property market, which was part-fuelled by speculation on borrowed money."
But as we noted late last month, shadow banking has a way of creeping into every market in China and as soon as you stamp out one conduit, another pops up in an endless game of Whack-a-Mole. Somehow, leverage always finds a way.
Over the past year or so, a new phenomenon has emerged: P2P lending for down payments on homes, and as we alluded to above, it's just as utterly insane as it sounds. Bloomberg recounts one borrower's experience:
When Fu Songtao found his ideal home in the suburbs of Shanghai, he faced the typical problem of would-be homebuyers: Coming up with enough cash for a down payment. So Fu turned to an online solution. His property agent offered him a zero-interest loan, funded entirely online by peer-to-peer lenders, that covered almost half his deposit.
"Everybody I know took out these loans," said Fu, a 29-year-old employee of a state-owned enterprise, who borrowed 380,000 yuan ($58,000) a year ago, with interest payments to lenders subsidized by the property agent, for his 3 million yuan apartment, and has seen its value increase to 3.3 million yuan since. "If you can borrow like that, why not?"
Right, "why not?" One reason is because you are effectively taking out a zero down payment mortgage. If you can't figure out the problem with that then you probably have no business buying a home in the first place.
In any event, this type of lending is proliferating - at a rapid clip. In fact, according to Bloomberg, "peer-to-peer lending for property in China grew more than six times faster than loans extended through banks last year" to $18 billion. That's up 163% over 2014 and dwarfs the 21% increase in outstanding mortgages.
In some ways this is a self-fulfilling prophecy. That is, borrowers (and speculators) see the price gains the practice is fuelling and, not wanting to miss out, dive in as well, driving prices still higher and perpetuating a kind of greater fool boom. Have a look, for instance, at the following chart which shows that China's housing bubble - at least in Tier-1 cities - is alive and well:
As we put it last month, "now that the Chinese stock market bubble has burst, the local population has to find a new asset class which to chase for the next few months, and for the time being that asset is housing; and since the politburo gets to boast that the Chinese economy is 'improving' as a result of this scramble, no 'macroprudential brakes' will be deployed before it is again too late."
Well, when it comes to macroprudential brakes, the Politburo might be prepared to make an exception for P2P down payment loans. Just as P2P lenders were forbidden from loaning money for stock purchases last summer, so too is Beijing set to ban P2P loans for down payments. "New rules being drafted by the central bank, the China Banking Regulatory Commission and other bodies would bar developers, peer-to-peer networks and other non-banks from offering down-payment loans," Bloomberg writes. "Banks would be required to scrutinize mortgage applications and reject those with deposits funded by loans."
"[External financing] started to boom in 2014, helped by online and mobile technologies," Clement Luk, chief executive officer for eastern China at realtor Centaline, told Reuters, who also notes that "property loans account for around 15 percent of all online financing in China, according to Xu Hongwei, chairman of a data provider on the business, Wangdaizhijia." Shanghai-based Yingcan says the number is far higher, at 23%.
And while at least one broker is already under investigation for facilitating down payment loans, analysts say the sector will be difficult to police, given the fact that lenders brand them with innocuous names that would not immediately indicate that they were made for down payments on property. Here's BofAML with a bit of color on the market:
The overall property market recovery that began in the spring of 2015 has been supported by a string of monetary-easing measures and supportive property policies. Moreover, the pursuit of capital gain and lack of attractive alternative investments amid the economic downturn have stimulated purchase demand in Tier-1 cities and helped fueling up prices while the supply remains tight. A recent Xinhua News article has warned about housing speculation, especially in Shenzhen, suggesting speculative purchases account for 30% home transactions at present. Home mortgages loan as a percentage of total loans are still relatively low, at 10.1% in Beijing, 14.5% in Shanghai and 22.9% in Shenzhen, vs. 15.4% nationwide. However, there are some other forms of leverage gaining its popularity to speculate in the Tier-1 housing markets, such as mortgage down-payment loans provided by some property agents and P2P platforms. But the size of such loans should still be quite small. For example, the outstanding loans by Lianjia (a leading player in this field) are at RMB2.9bn currently, with typical maturity of 90 days.
If the typical maturity is 90 days and with interest rates sometimes running as high as 2% per month, it seems rather clear to us that borrowers might indeed default en masse should the economy take a decisive turn for the worst and should Beijing live up to its promise of stripping excess capacity from the industrial sector.
On the other side of the equation, lenders are promised returns of up to 10% per year for financing this madness.
Of course this is, like the rest of China's shadow banking sector, a Catch-22 for Beijing. If China cracks down on down payment loans, it may curtail the property market and thus dent the economy. If they don't crackdown, more and more leverage will be embedded into the system making the eventual collapse that much more spectacular. Summing up the government's dilemma is Hu Xingdou, an economics professor at the Beijing Institute of Technology:
"China has learned a lesson from the U.S. subprime crisis. The Chinese government understands that they have to solve problems like housing and overcapacity. At the same time, they can’t bring further risks to the financial system, as the banks already have a lot of bad debt.”