China’s real estate industry has developed rapidly in the past 20 years, and housing prices in first-tier cities such as Beijing and Shanghai have leapt to the forefront of the world. According to the World Bank report, the real estate industry accounts for about 30% of China’s GDP.
“Looking in line for early mortgage repayment” has frequently made headlines in China in the past month and has become a hot topic on social media.
After the Lunar New Year, a large number of borrowers continued to pour into banks to apply for early repayment of mortgages, so that banks began to set “thresholds” – some banks closed the early repayment function on mobile phone clients, requiring customers to queue up to apply at offline outlets; Another bank said that the head office has set a monthly quota for early repayment of housing loans, but the current quota is exhausted and needs to be scheduled until April. Some netizens even said that they can only repay the loan until October.
Ms. Li, who lives in Sichuan, told BBC Chinese that she wanted to repay the mortgage early and was told to pay liquidated damages. In the past, the bank would usually negotiate to waive this liquidated damages, but now she has to pay. Just wait and see.”
Why do Chinese homebuyers have to pay off their mortgages early recently? Why are banks reluctant to see a tide of loan repayments?
Pain Points for Banks
For a long time, repaying loans in advance has been a basic function of banks, and most of them can be operated quickly whether online or offline. However, since the second half of last year, more and more people have paid off their mortgages early. In February this year, after the Chinese New Year, it has become a “tide”.
Chinese media quoted a personal loan manager at a branch of a joint-stock bank in Dongguan as saying that since January, the number of people repaying mortgages in advance has increased by nearly 50%, and there was a small peak after the Spring Festival. It is very big and needs to “fill this hole”.
On the one hand, China’s real estate market is experiencing cold weather, transaction volume is at a low ebb, fewer people are buying houses, and the growth rate of new mortgages has declined; combined with early repayments, there is a rare phenomenon that the growth of loan balances has almost stagnated.
According to the data of the People’s Bank of China, as of the end of the fourth quarter of 2022, the balance of personal housing loans was 38.8 trillion yuan (the same below, about 5.43 trillion US dollars), an increase of only 1.2% year-on-year, and the growth rate was 10 percentage points lower than that at the end of the previous year. It is the lowest in nearly ten years. The industry is concerned about whether there will be a reduction in housing loan balances in the first quarter of 2023.
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Since July 2020, including Evergrande, many real estate companies such as China Fortune Land Development, Blu-ray Development, and Sunshine 100 have defaulted on their bonds. Under strong supervision, China’s property market has entered a low tide period.
Banks frequently set “thresholds” to limit early loan repayment, also because housing loans are almost the best, most stable, and huge-scale assets for Chinese banks.
As of the end of last year, the balance of personal housing loans in China was 38.8 trillion yuan. If the amount of loan repayment in advance reaches 10%, it means that the bank’s housing loan volume will decrease by nearly 4 trillion yuan in the short term, which will bring challenges to the profitability of banks.
The pressure brought by the tide of early repayment of loans, just as the above-mentioned personal loan manager said, is the rising army of early repayment mortgages on the one hand, and the continued lack of credit growth on the other.
The data also reflect this point – data from the National Bureau of Statistics of China show that last year, real estate development companies put in place funds of 14.9 trillion yuan, a decrease of 25.9% from the previous year. Personal housing mortgage loans were 2.4 trillion yuan, down 26.5%.
“Paying down your mortgage early is a cost-effective option”
“I originally wanted to buy a new energy vehicle, but when I had to wait in line, I thought about repaying the loan in advance. I didn’t expect to wait in line. In the past, I had to line up to borrow money, but now I have to line up to spend money, and I have to line up to pay back the money.” said Ms. Li above. , I am willing to repay the loan in advance. On the one hand, there is a year-end bonus at the end of the year, and a sum of money from my family during the Chinese New Year, and I have idle funds on hand.
“And now the bank’s wealth management products have too low income, which is lower than my loan interest rate, so it’s better to pay it back.” Ms. Li introduced that she bought a one-bedroom apartment in 2018, and the interest rate was over 4%. When buying a set, the loan interest rate exceeds 5%, while the usual regular investment fund products are “almost all losing money”, and the yield of bank wealth management products is only 2%.
A real estate practitioner in Wuhan said that when recommending others to buy a house, they always borrow as much as they can, because as ordinary people, housing loans are almost the lowest interest rate funds that can be loaned. Go to other investment channels, and it is not recommended to buy a house with all the money.
“But it’s hard for me to suggest that now, because the profitability of various investment channels has dropped sharply, and small businesses are also in a downturn. In addition, for people who bought houses in the past five years, the interest rate has been as high as 5%. By comparison, the advance repayment Mortgage loans are almost a cost-effective option.” said the above-mentioned real estate practitioners.
It is worth mentioning that under the influence of the epidemic, China’s economy is under pressure, and the stock market has also performed poorly. In 2022, the net value of nearly 3,200 public offering fund products that focus on investing in the Chinese stock market will drop by more than 20%, and even underperform the performance of the Shanghai and Shenzhen 300 Index.
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