Shanghai wants to avoid a scenario similar to 2009 America’s housing crisis. The situation in the Chinese city, facing a surge in dubious real estate loans, reminds us of the situation in the United States before the subprime crisis which drove the world to the worst recessions since the Great Depression in the 1930s. In reaction to the surge of real estate prices in Shanghai, the municipality has forbidden bank loans for six major property agencies. This is another measure taken by Chinese authorities to cool down the housing market.
Chinese Economy Highly Dependent on Real Estate
Real estate, nevertheless, allows the growth to sustain and is one of the main pillar of the economic development of China. The housing sector accounts for 15% to 20% of China’s GDP in 2016. A slowdown or a rebound in the sector activity have direct and big impacts on the other industries that depend on it. The rebound of the real estate industry is one of the main reason of the recovery of the Chinese manufacturing sector in the last two months, after it dropped off in the last quarter of 2016, thanks to a massive increase in loans granted by banks.
Although Shanghai has already taken several measures to try to curb the increase in prices, the real estate market is still very dynamic. Industry players fight fiercely through advertising campaign to attract investors looking for opportunities to invest their money. If the city center of Shanghai appears to be a saturated market, residential buildings in suburban districts sprout like mushrooms and experience the strongest rise in prices. The type of housing usually consists of nice apartments in premium compounds with onsite facilities. According to China Real Estate Index System, prices rose by more than 6% in suburbs of Shanghai like Songjiang or Jiaxing.
In Songjiang, property prices are between $5,000 and $13,000 per square meter. There was a slowdown after the strong increase (+ 17.5%) beginning of 2017, which lead the authorities to restrict the purchasing conditions for non-residents and increased the initial input required from buyers.
Since then, property prices have cooled down, but everything leads us to believe that the curve will continue to rise. In Shenzhen, the metropolis that faces Hong Kong, apartment prices have risen more than 57% since 2015. This could inspire landlords of other major cities of China. Especially since it has never been so easy to buy: interest rates have fallen six times last year. “The conditions for real estate buyers have probably been the most favorable for ten years,” said Steven McCord, an analyst for the real estate consulting firm Jones Lang LaSalle.
Lower interest rates
Shanghai implemented new restriction on the purchase of apartments and houses. According to Caixin, the city would consider increasing the initial contributions up to 50%, or even 70%, for purchasing a second home. However, with the increase of online banking services, it is now easier to obtain loans that traditional banks cannot grant.
According to the Shanghai-based Yingcan real estate analysis firm, private lending platforms lent 924 million yuan ($ 180 million) to finance these initial payments, three times more than in July 2015. The interest rates of these online services can reach 25% per year.
However, online finance is not the only one responsible. In order to be legal, real estate transactions must be done through agencies which take advantage of their position to act as intermediaries for loans, but also as a screen between banks and customers.
Since March 2017, banks refuse loans to the six agencies punished by the authorities. They are the largest agencies on the market. Investigations have also been launched against online finance since the beginning of the year.