S&P Global stated on Monday that the latest measures taken by China to revive the struggling real estate market may pose risks to banks in third and fourth-tier cities.
According to a report by S&P Global, the measures announced earlier this month by the Communist Party of China, such as lowering down payment requirements and abolishing the lower limit on mortgage loan rates, are expected to temporarily boost real estate demand. However, the increase in leverage could also lead to a rise in mortgage loan defaults.
The report forecasts a approximately 14% decrease in real estate prices in third and fourth-tier small cities from 2024 to 2025. This may potentially put some homebuyers in a negative equity situation, where the outstanding mortgage exceeds the value of their property. As a result, some homebuyers may abandon their properties, leading to mortgage delinquencies.
Ryan Tsang, a credit analyst at S&P Global Ratings, said, “The removal of the lower limit on mortgage loan rates will reduce lenders’ buffer space to absorb potential losses in case of default. In this scenario, banks will have to incur additional costs to go after defaulters’ other assets to minimize losses.”
In response to the “historic” measures announced by the Chinese government on May 17 to stabilize the crisis-affected real estate industry, some cities in China, including the first-tier city Shanghai, second-tier cities Wuhan and Changsha, have already reduced down payments and mortgage loan rates.
Nationally, the minimum down payment for first-time homebuyers has been lowered from 20% to 15%, while the minimum down payment for second-time homebuyers has been lowered from 30% to 25%.