In Friday Oct. 24th’s New York Times, there’s an article “In China, the Government Eases Mortgages as Real Estate Loses Its Sizzle”. It gave a more thought-provoking analysis on the mortgage issue between the market in China and the market in US.
The most significant difference is that the market is still strictly regulated in China. “Roughly half of Chinese home buyers still pay cash for their homes and do not take a mortgage at all.” This can perfectly explain why there are less default rates in China. As I mentioned in my blog, the down payment for the first apartment should be at least thirty percent of the price, and to prevent cases like speculation and risky investments, the down payment for the second apartment is raised to forty percent of the price. Although, as the housing price plummets in China, the down payment for the third house has been reduced to twenty percent, it is still not likely for homebuyers to commit default. Secondly, there’s a term limit for homebuyers to pay back loans. “The term of the mortgage must end when borrowers turn, for a woman, or 60 for a man.” Government takes this kind of regulation because they fear that people won’t have enough income to pay the loan back after they retire. Finally banks in China cannot sell the mortgage to each other as American banks do, which is called securitization, so they are less likely to suffer from bankruptcy.
What I found interesting is that “American banks and lawyers unsuccessfully urged China for years to allow securitization, but have curbed these pleas in recent months after seeing the global financial crisis unfold.”So maybe sometimes regulation is still good, no matter what kind of economic system people have, what kind of ideology they embrace. Deregulation is not always the smart choice.
The most significant difference is that the market is still strictly regulated in China. “Roughly half of Chinese home buyers still pay cash for their homes and do not take a mortgage at all.” This can perfectly explain why there are less default rates in China. As I mentioned in my blog, the down payment for the first apartment should be at least thirty percent of the price, and to prevent cases like speculation and risky investments, the down payment for the second apartment is raised to forty percent of the price. Although, as the housing price plummets in China, the down payment for the third house has been reduced to twenty percent, it is still not likely for homebuyers to commit default. Secondly, there’s a term limit for homebuyers to pay back loans. “The term of the mortgage must end when borrowers turn, for a woman, or 60 for a man.” Government takes this kind of regulation because they fear that people won’t have enough income to pay the loan back after they retire. Finally banks in China cannot sell the mortgage to each other as American banks do, which is called securitization, so they are less likely to suffer from bankruptcy.
What I found interesting is that “American banks and lawyers unsuccessfully urged China for years to allow securitization, but have curbed these pleas in recent months after seeing the global financial crisis unfold.”So maybe sometimes regulation is still good, no matter what kind of economic system people have, what kind of ideology they embrace. Deregulation is not always the smart choice.
2 comments:
I find the comparison between China and the US housing market fascinating. It's almost funny to hear that restrictions have been somewhat loosened to allow ONLY a 20% downpayment on a THIRD HOUSE! Is there a large percentage of people who own three houses in China? I can't imagine that there are many in the US who could afford to put 30% on a first house and 40% down on a second, not to mention 20% down on a third. But I'm happy for those who can!
I definitely think that not allowing banks to sell mortgages to other banks is a smart move. It motivates the bank to be more conservative when making loans, because they will be responsible for them.
Thank you for your comment energy4tomorrow. And I want to clarify that it is not always technically a "house", more people tend to buy apartments in China.
It is absolutely not a large percentage. A few years ago, when the housing price was amazingly high, people invested a large amount of money in houses. People who bought three houses might sell or lease two or even all of them, just the same as what it was here several months ago. After Chinese government realized the market would grow out of control, they increased the down payment of the second purchase. And now, when there's a downturn in housing prices, government imposed a new down payment policy to stimulate investment. So it's basically about investment. Anyway, there are rich people in every country.
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