Deals collapse as cooling measures bite

HONG KONG: A growing number of homebuyers in China are defaulting on purchase agreements and forfeiting deposits because they fear tougher policy settings will trigger a sharp fall in property prices, estate agents say.

Estimates of the scale of defaults vary widely, with China media reporting at the weekend that Hong Kong agency Centaline warned that up to 3,000 contracts were in danger of being cancelled in Shenzhen in the fourth quarter, and 10,000 in Beijing, where data showed the cancellation rate had jumped to 12.8%.

But agents spoken to by the South China Morning Post disagreed with the estimates. "We have encountered about 50 cases recently, where buyers have decided to forfeit their deposits and walk away from contracts in view of increasing market uncertainty," said Andy Lee Yiu-chi, head of Centaline's Shenzhen branch.

The defaults are occurring in Shenzhen, Guangzhou and Beijing, with buyer sentiment turning sharply negative; sales volumes in these markets have tumbled by up to 60% so far this month from September. Lee expects a further 400 deals could be on the verge of collapse in Shenzhen.

"The market is pretty quiet as most buyers have taken a wait-and-see attitude since the government introduced tougher measures to curb property price growth earlier this month," Lee said.

The blow to sentiment was triggered mainly by the Sept 29 central government order to banks to suspend loans for third-home purchases from Oct 1, as well as the government's plan to introduce a property tax — without disclosing any details yet — throughout the country.

Everyone buying a first home must now make a down payment of at least 30%, up from 20% previously, and 50% for a second home (up from 40%). Families who already own a home will be prevented from buying more than one additional home. Currently, 14 cities have introduced the restrictions to curb speculation.

Deteriorating sentiment resulted in sales in Beijing in the primary and secondary markets falling by 20% from Oct 1 to Oct 20.

"First-time homebuyers have been adversely affected by the tightening of mortgage lending conditions that took effect on Oct 1," said Kenneth Pak Kei-yuen, a senior general manager in the Beijing office of Hong Kong estate agency Midland Realty. With the minimum down payment having been raised to 30% at short notice, most first-time buyers found it difficult to borrow an extra 10%, he said.

Pak said those buyers who put down initial deposits of 10,000 yuan to 20,000 yuan (RM4,650.36 to RM9,300.72) when signing preliminary sale-and-purchase agreements before Oct 1 would face challenges in securing 80% mortgage loans due to the sudden change in lending policy.

"Some have decided to cancel their deals if they failed to convince the owners to refund the initial deposit to them. They believe they will be able to return to the market after prices decline." Pak said he did not know the number of default cases, but he did not believe defaults were happening on a large scale.

In Guangzhou, according to the Guangzhou Daily, about 70 buyers cancelled deals this month and average daily sales volume had plunged 52% to 388 deals so far this month compared with September.

Although sales volumes across the market had fallen, said Centaline's Lee, developers and homeowners were reluctant to lower their asking prices. "There is no sign of a sharp price fall now. Normally prices will fall only if the slow sales persist for several months," he said. — South China Morning Post