P2P property lending takes hold in, China but does it increase risk in the, property market?
China’s burgeoning property market continues to go from strength to strength with property prices climbing by 14% in China’s four first-tier cities during 2017. But there are fears the market is being fueled by “illegal” P2P lending practices with private lenders and developers providing P2P loans to help borrowers build a deposit. The practice adds unnecessary risk to the Chinese property market with buyers becoming over-leveraged and wears down the effectiveness of macro-financial controls which are used to control excess in the market, according to PBoC governor Zhou Xiaochuan.
P2P lending grew six times faster than bank lending
To emphasise the scale of the problem a recent report by Bloomberg showed that peer-to-peer lending has increased more than six times faster than traditional bank lending over the past four years, with the market now worth a staggering $18 billion. That’s a climb of 163% since 2014 and dwarfs the 21% increase in mortgage lending during the same period. This is a double-edged sword for property buyers because non-bank lending practices are fueling price gains in the market and borrowers, desperate to get on the property lad
der, are struggling to raise the necessary deposit. It also raises fears of a bubble in domestic property prices which could come crashing down in a similar way to the collapse of the US housing market in 2008. Property developers are adding fuel to the flames by tempting buyers with zero interest loans for deposits. With such schemes, the developer offers to subsidise interest payments on peer to peer loans essentially allowing prospective buyers to purchase property with zero down payment. The problem with zero down payment mortgages is that they leave homeowners dangerously exposed to negative equity when property prices fall. And with Chinese house prices entering a period of non-sustainable growth, that is a scenario that is more likely than not to occur in the next few years.
Relaxed rules are partly to blame for the crisis
The crisis has been partly blamed on China relaxing rules on down payments to help fuel the local economy. Following the financial crisis of 2008, Beijing introduced a range of restrictions on first-time and second-home buyers to help cool the overheating property market, thereby preventing a repeat of the US subprime crisis at home. But these rules have been slowly relaxed as the global economy recovered to pre-recession levels. This has allowed many private lenders to step in by providing peer to peer loans to help prospective buyers find a deposit to purchase their first home or even second home.
New legislation aims to put the brakes on private lenders
In an effort to curb the practice and put the brakes on an overheating housing market the China Banking Regulatory Commision is drafting a new set of regulations which aim to bar developers, private lenders and peer to peer networks from offering loans for the down payment on a property. The new rules will require mortgage lenders to scrutinise applications and reject loans where the deposit has been funded by loans of any type. However, this may be easier said than done, with many loan providers branding loans with innocuous sounding names in an effort to disguise the fact that they were provided for the purposes of a down payment on a property. Whatever Beijing decides to do, it has to tread carefully. If it cracks down too hard on the practice it risks causing a housing price crash which would see thousands of Chinese citizens fall into negative equity. If it lets the practice run out of control more leverage will be embedded into the economy which