Chinese taking on more debt to buy apartments; housing prices flat

The PBoC reports that the average household debt burden has soared this year, up about 30 % y-o-y. While growth has slowed slightly in recent months, it is still somewhere above 20 %. The debt of Chinese households corresponds to less than 50 % of GDP, which is still rather modest by international standards. About 75 % of the debt consists of housing loans.

While most Chinese own the apartment in which they live, purchasing an apartment with a bank loan and mortgage is a relatively new trend in China. Buyers earlier paid cash for apartments, and part of that cash was borrowed from parents or extended family members. The vibrant growth in apartment loans, however, has made banks and households increasingly exposed to a possible decline in housing prices. Apartment buyers are known to use consumer loans and other short-term financing to cover their downpayment requirement (30 % of the apartment's price, for example, in Shanghai). Other credit channels – even illegal ones – are also used to circumvent the downpayment requirement.

The rise in housing prices in recent years reflects the rapid growth in housing loans. In China's largest cities, housing prices are among the highest in the world when adjusted to local income levels. China's top leaders have long worried about expensive housing. To calm the situation, many cities have tightened the rules on apartment sales by e.g. further increasing the downpayment requirement or making a rule that buyers cannot resell their apartment for two, three or even five years from the date of purchase. Banking supervisors are also expected to have increased scrutiny of housing loans.

The National Bureau of Statistics reports housing prices in big cities remained largely unchanged during the summer and autumn in big cities. In smaller cities, however, the increase in apartment prices continued, albeit at a more modest pace. Variations in housing markets across regions are huge, and can even vary wildly from city to city or neighbourhood to neighbourhood.

The slowing of housing price growth is reflected in construction activity. Growth in housing construction activity slowed substantially in late summer and autumn, but revived in November. Purchases of land use rights for lots zoned for construction have also picked up sharply since summer.