Chinese buyers defaulting on price-fall fears

HONG KONG: A growing number of would-be homebuyers in Shenzhen, Shanghai and Beijing could walk away from signed purchase agreements because they fear house prices are set to fall heavily, say estate agents. By quitting now and forfeiting their deposits, they believe they will be able to cut their losses by returning to pick up bargains after prices have fallen.

"The property market is entering a chilly winter and genuine homebuyers will not return until prices have dropped at least 20%," said Samuel Wong, a director in the Shenzhen office of Midland Realty.

The collapse of confidence was triggered by a State Council decision announced last Thursday (April 15) that minimum down payments on first homes of more than 90 sq m would be lifted from 20% to 30%; and from 40% to 50% for second homes.

In a sharp crackdown on what it saw as rampant speculation that was pushing prices beyond the reach of too many genuine homebuyers, the State Council also instructed banks to raise minimum mortgage rates on second homes to 1.1 times the central bank's benchmark lending rate instead of the current 80%; and ordered banks to stop all lending for third-home purchases.

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

"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 sq m apartment for 1.2 million yuan (RM561,650) 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.

More costly home loans would also hit overstretched speculators and forced sales could accelerate the price fall. "Some speculators have bought three to five apartments to bet on capital gains. But they will now be forced to sell down their portfolios in view of the abrupt change in sentiment," he said.

Mainland media reported that an investor in Shenzhen had already put "hundreds of units" up for sale, while an investor in Beijing had rushed to sell 30 units in view of the U-turn in market sentiment.

In Beijing, home prices had jumped 50% to an average of 18,000 yuan per sq m from a year ago ahead of last week's announcement, but developers there and in Shanghai are now reported to be offering discounts of 7% and preferential payment terms.

"The credit crunch will most affect those buyers with tight budgets. They may call off their purchases because of the need to make higher down payments," said Clement Luk, chief executive for the eastern and northeast China offices of Centaline Property Agency.

Some individual buyers had already forfeited their deposits and although this was not yet happening in large numbers, the tightening of lending would have an immediate chilling effect on sales, Luk said.

Midland's Wong said about 1% of its clients had already chosen to default on their home purchases as uncertainties about the direction of prices increased.

"Transaction volume in the secondary housing market is bound to fall about 50% from normal days," added Luk, who said that until the latest developments, the agency had generated about two million yuan a day in sales commissions.

Now some nervous owners, particularly those holding a large portfolio, would likely offer discounts of 3% to 5% in the hope of still quitting the market at a profit since prices had surged significantly last year.

Others may be tempted to dig their heels in like Hong Kong businessman George Au and wait for the scare to pass.

A week ago, just ahead of the new policy measures, Au decided to offer one of his 40 sq m units for sale at 700,000 yuan once his tenant moved out -- about 27% higher than the 550,000 yuan he paid in April last year. Now he plans to hang on and wait. "Now is not a good time to sell," he said.

Au said his holding costs were not excessive and the rental income on one of the units was more than enough to cover the 2,000 yuan monthly mortgage payment, while he would now also lease the second unit. "Then I will buy a bigger unit if prices fall 20%," he said. – South China Morning Post