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China's housing market should be alert to American-style risks
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15:54, July 06, 2009

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It was recently reported that commercial banks in some cities have lowered their lending thresholds and require a down payment of just 10 percent to compete for more consumers. Not only does this practice violate regulatory requirements, but it also increases potential risks to the banks.

The strong flow of credit has eased the financial strain faced by real estate developers and expanded demand for housing purchases, particularly as a form of investment. This increased the general public's inflation expectation, and pushed up housing prices.

However, uncertainties still exist as China's real economy has not fully recovered and the basis of housing prices remains unstable. If house prices fall by over 10 percent, the risk of mortgage defaults will substantially increase.

In addition, the practice of lowering mortgage down payments will amplify speculation in the market, boost the formation of asset bubbles and intensify market fluctuations.

The index of residents' confidence in future income stands at just 3.4 percent, a drop of 14.3 percentage points quarter-on-quarter and 16.9 percentage points year-on-year, according to a recent survey by the central bank. If the income of house buyers falls, mortgage default rates will increase.

In the past, in order to stimulate its economy and accelerate the recovery of its real estate market, the US government relaxed mortgage regulations and lowered lending thresholds for mortgages by requiring zero down payments and offering loans to families originally deemed incapable of repaying the loan.

However, as house prices continued to fall and interest rates rose, mortgage default rates significantly increased, triggering a chain of market crises. This is a lesson we cannot afford to forget.

By People's Daily Online


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