Transcript The Mortgage Markets

1
 Preview for Readings
 Neo-liberal Housing Market?
 Housing Reform Policies after 1998
 The Evolution of the Mortgage Markets
 The Framework of Housing Finance System
 The Lending of Mortgage Market
 Discussion on Housing Market
 Monetary Policy and Housing Prices
 Conclusions
2
Preview
 Yongheng Deng and Peng Fei. The emerging mortgage
markets in China. In Danny Ben-Shahar, Charles Ka
Yui Leung, and Seow Eng Ong. Eds., Mortgage
Markets Worldwide. Blackwell. 2008. 1-33.
 Perry Wong and Diehang Zheng. Financial instability’s
lending and real estate property prices in China. In J.R.
Barth et al. eds., China’s Emerging Markets. 2009. 475493.
3
 Ya Ping Wang, Lei Shao, Alan Murie and Jianhua Cheng, The
Maturation of the Neo-liberal Housing Market in Urban China,
Housing Studies, vol.27, No.3, 343-359, April 2012.
 Mark Stephens, Locating Chinese Urban Housing Policy in an
International Context, Urban Studies, 47 (14) 2965-2982,
December 2010.
 Qiang Li, Satish Chand, House Prices and Market Fundamentals
in Urban China, Habitat International, 40 (2013), 148-153.
 Xiaoqing Eleanor Xu and Tao Chen, The Effect of Monetary
Policy on Real Estate Price Growth in China, Pacific-Basin
Finance Journal, 20 (2012), 62-77.
4
1. Neo-liberal Housing Market?
 Neo-liberalism has dominated policy formulation and
implementation for three decades and been infuential in
reshaping urban housing provision in different countries.
 Neo-liberal approaches have involved reduced state
intervention in social and economic affairs and the
assertion of the superiority of market processes.
 Accounts of this neo-liberal housing policy refer to
privatization, increased rents, reduced subsidy,
deregulation of private housing and mortgage lending and
weakening of planning controls for new and existing
housing.
5
A Discussion of Policy Outputs
 How liberalization of markets has affected
investment and ownership of housing and patterns
of access and residence.
 It is said that neo-liberalism captured some basic
features of market reform in China.
 What is new-liberalism?
6
Discussion on Ideal Type Neo-liberalism
 First, the individual is the normative center of a society and
should be as unencumbered by rules and collective
responsibilities as possible.
 Second, the market is the most effective means through
which individuals can maximize their own utility functions.
 Third, state actions that interfere with either individual
autonomy or market relations lead to autocratic society,
regardless of their intentions.
 In China neo-liberal reforms have been modified a period
of economic turbulence.
7
2. Housing Reform Policies after 1998
 Policy aimed to create a diversified provision system with
three distinctive types of housing.
 Government subsidized social rental housing;
 Government supported affordable housing;
 Commercial housing.
 In two decades China had changed from being a nation
renting from state owned enterprises or other state
organizations to become a nation of homeowners.
 Discussion!
8
Major Features for Housing Reform
 The Asian financial crisis and the housing market
from 1998 to 2002.
 By 2002, urban housing development had helped
China to successfully avoid serious negative
impacts from the Asian financial crisis. The real
estate industry emerged as a key economic sector.
 Most of the policies were in fact creating necessary
financial environment and institutions for market
functioning.
9
Investment in Real Estate Sector
2003
2008
2009
2010
2013
2014
Total Fixed –Asset
Investment, RMB Trillion
Real
Estate
RE/Total
%
4.58
14.87
19.39
24.14
43.58
50.20
1.11
3.59
4.31
5.76
11.14
24.24
24.15
22.24
23.87
25.56
10
Investment in Real Estate,
RMB Trillion
Investment in Real Estate
12
10
8
6
4
2
0
2003 2004 2005 2006 2007 2008 2009
2010
2011
2012
2013
Investment in Real Estate
11
Discussion on Housing Demand
 Conditions in the urban housing market had
changed substantially by 2002.
 Urban population;
 Income rising: there were large increases in the
salaries of mainstream urban residents;
 Unequal income distribution;
 Others
 Discussion!
12
Population and Urbanization
 The Chinese population is expected to grow by some 14
percent between 2000 and 2030, compared with 40 percent
among the developing countries as a whole.
 China is continuing to urbanize rapidly, with the
proportion of the population living in urban areas expected
to rise from 36 percent to 61 percent in 2030.
 So, continued urbanization in China and other developing
countries is based on urban population growth.
 What policies have been designed to accelerate china’s
residential housing markets?
13
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Population Composition by Residence
80
70
60
50
40
30
20
10
0
Urban
Rural
14
Discussion on Slums and Shanties
 A growing slum and even shanty towns for many
developing countries, especially in their large cities.
 China has been identified as the only large country,
so far, to urbanize without the creation of large
slum areas or informal settlements.
 What can we find some real reasons from their
policy package to it?
15
House Price Inflation
 Faced with a property market price increases and
complaints from middle to low-income urban
residents, the government has intensified its
macro-economic adjustment program since 2005.
 Clearly, these policies relied essentially on political,
administrative and land use planning measures,
and their effects were limited and finally failed.
 Further discussion on initial policies and followed
adjustment policies.
16
Average Selling Price, Yuan/sq.m
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
Residential buildings
High-grade Apt.
17
 The selling areas of high-end residential housing
accounted for 5% of total residential housing sale,
4% for affordable residential housing sale with
remaining 91% being sale of normal residential
housing.
 New issues on China’s house quality and its
implication for the demand of higher-end houses.
18
Discussion on House Prices
 Along with the reform process, both economic
prosperity and rapid urbanization have boosted
the demand for housing.
 How much of the real appreciation in house prices
can be explained by market fundamentals?
 What are the most important factors in
determining housing prices in each province?
19
Explanation on Housing Prices
 The economic fundamentals: impending marriages?
Disposable income, user cost and construction costs……
 The provincial distribution of different level of housing
prices is related to the local economic conditions with
more developed provinces experiencing higher price levels.
 Besides, housing prices in more developed provinces are
determined by the supply factors including construction
costs and land prices, while prices in other provinces are
determined by both the demand and supply factors.
20
 A special case of the global credit crunch in
2008/2009.
 Despite these policy efforts, house price rose
between 2009-2013 in many cities. Why?
 What is “structural problems” of the real estate
market?
 Many policies have been issued, these rules were
seen as tough, but did not stop house price inflation,
Why?
21
Discussion on housing market regulation policy
 Neo-liberal policies;
 The policy direction for central government;
 Incentives for local municipal governments
that were more interested in promoting
commercial housing development.
22
 What is the major factor of China’s land
system in the support of local house
development?
 The Chinese housing market represents a
distinctive, emerging and maturing market.
Is it a good judgment?
23
Housing Price Bubble or Not?
 In a competitive market, housing supply
increases with price and decreases with
vacancy rate.
 When the market follows adaptive
expectation, i.e. expects a slow change in
price, it is the lagged price, rather than
current price, that is used to determine the
demand and supply.
24
Policy Problem in China
 Vacancy rate does not serve as the theoretically
significant guidance in many Chinese real estate
markets, which is typically represented by a
lengthy mismatch between higher-end housing
demand and supply.
 Domestic investment activities and resource
allocation are highly influenced by government
policy.
25
3. The Evolution of the Mortgage
Markets
 The emergence and rapidly mortgage market in China
has become a powerful financial engine for booming
housing development and sustained economic growth
since the turn of century.
 The development of the residential mortgage market
in China has been a strategic element of the
household-ownership oriented housing reform
orchestrated by the central government of China.
 The emergence of residential mortgage-lending has
made the mortgage market the dominant growth
stimulus for the Chinese banking industry.
26
Major Reform Steps
 Between 1949 and the mid-1980s, a residential
mortgage system was non-existent in the sector of
urban residential housing.
 In the 1988 Constitutional Amendment, although
the government still retained the ultimate
ownership of urban lands, it permitted individuals
to purchase the right of use land for urban
residential purpose up 70 years.
27
 The private-owned residential units began
to emerge in China, but the development of
the commodity housing sector had a slow
start.
 In the 1990s, China issued a series of
housing reform measures and policies to
accelerate the development of housing
markets.
28
 Private developers were allowed to develop
residential housing projects and the
housing stock was sold to tenants at belowmarket prices.
 To enhance the liquidity of the housing
market, the secondary housing market was
also founded.
29
Outstanding Balance of Mortgage
Loans (billion Yuan), 2003-2012
Households
HH/GDP
RED
RED/GDP
Land De.
LD/GDP
2003
1177.9
2004
1592.2
9.96
780.0
4.88
2005
1843.0
9.97
914.1
4.94
2006
2250.6
10.40
1410.0
6.52
2007
2696.8
10.15
1800.0
6.87
2008
2980.0
9.49
1930.0
6.15
2009
4760.0
13.96
1860.0
5.46
667.8
1.96
2010
6200.0
15.44
2300.0
5.73
832.6
2.07
2011
7140.0
15.10
2720.0
5.75
768.0
1.62
2012
7500.0
14.45
3000.0
5.78
863.0
1.66
HH: households; RED: Real estate developers; LD: Land developers.
30
Outstanding Mortgage Loans to GDP
18
16
14
12
10
8
6
4
2
0
2004
2005
2006
2007
Household Loans/GDP
2008
2009
2010
2011
2012
Real Estate Loans/GDP
31
 The housing reform has created residential mortgage
lending business, propelled the development of China’s
mortgage market from its negligible status in 1997 to more
than Yuan 23.1 trillion (US$ 3.76 billion) by 2014, made
China the largest mortgage market in Asia.
 China’s mortgage lending accounts for 36% of GDP in 2014,
which is low compared to 65% for Singapore, 50% for Hong
Kong, and 58% for the US in 2002.
 Comparative studies in international experience.
32
Mortgage Lending
 The emergence of residential mortgage-lending has
made the mortgage market the dominant growth
stimulus for the Chinese banking industry: US$ 200
billion in 2004 and US$ 3760 billion in 2014.
 It has been a typical case for rapidly growing mortgage
lending market since 1998 in China.
33
Outstanding Balance of mortgage Loans in
China, Yuan billion
Mortgage loans
Annual growth
Annual growth rate
Mortgage as % of bank loans
Mortgage as % of GDP
1998
43
30
124.2%
0.5%
0.5%
2004
1800
470
35%
10.1%
13.2%
2014
23100
3300
16.6%
28.7%
36.3%
34
The Housing Provident Funds (HPFs)
 The Housing Provident Funds (HPFs) modelled on
Singapore’s Mandatory Provident Funds.
 The State Council issued the Ordinance of
Provident Housing in March 1999.
 The establishment of HPFs marked the beginning
of the residential-housing financial system in
China.
 A real role of the HPFs to China’s residential
housing market.
35
Residential Mortgage Lending
 In 1998, the central government accelerated housing
reform by undertaking a series of major reforms in the
housing finance system.
 The PBC issued the Regulation on Residential
Mortgage Lending.
 The housing reform has set up a private property
market in China through the privatization of the stateowned housing system and the recognition of private
property ownership, which in turn speeded up private
capital formation and private wealth accumulation.
36
4. The Framework of Housing
Finance System in China
 A dual channel housing finance system
 The system is operated through both the policy-driven
housing finance channel and the market-driven
housing finance channel.
 The policy-driven housing finance is mainly through
HPFs, which are mandatory housing savings scheme,
while the market-oriented housing finance is
characterized by commercial loans from banks.
37
38
The Features of the HPF
 The HPF in China is mandatory housing savings
scheme. All employees in the urban areas are required
to contribute a certain portion of their salary to the
scheme and employers are required to match the
contribution. The contribution is deposited monthly
by the employer into a special HPF account for each
employee at a commercial bank.
 The account will be closed only if the account holder
has left the city, retired or deceased.
39
HPFs Operation in Shanghai
billion Yuan
HPF Collections
HPF Drawing
Households loans of HPFs
2001
9.30
4.97
10.46
2002
10.94
6.30
11.96
2003
14.11
8.38
11.43
2004
15.93
9.72
10.48
2005
19.93
11.51
8.97
2006
20.45
12.58
18.63
2007
23.19
14.74
28.79
2008
28.25
16.34
19.88
2009
33.78
18.88
56.60
2010
39.04
22.61
30.29
2011
49.90
24.04
26.51
40
HPF Collections and Loans for
Households in Shanghai, 2001-2011
60
50
40
30
20
10
0
2001
2002 2003 2004 2005 2006 2007 2008 2009
HPF Collections
2010
2011
Loans for Households
41
Housing Provident Fund Management
Centre
 The centre is under the supervision of the
municipal government, which is also
responsible for making relevant HPF policies.
 All cities have their own policies or rules on
fund contribution, therefore, the
contribution rate varies by city.
42
 New development of a supplement
account of HPF for some organizations.
 A new progress case of 2015!
43
5. The Lending of Mortgage Markets
 Hybrid mortgage
 Hybrid mortgages that combine the maximum
amount of HPF funds and commercial mortgages were
rapidly developed by many banks in China.
 Under the current housing finance system in China,
individual homebuyers use both HPF loans and
commercial mortgage loans for the purchase of
commodity housing units from the market.
 Loan-to-value (LTV)
44
The Primary Market for Commercial
Mortgage Lending
 In May 1998, The PBC established the basic
mortgage lending standards, including a
maximum LTV ratio to 70%, and mandatory
income verification.
 PBC also regulated the preferential mortgage
interest rate and set the mortgage rate 10 basis
below commercial loans with the same term.
45
 Today, all mortgages in China are adjustable
rate mortgages (ARMs).
 China’s mortgage market has experienced an
unprecedented growth since 2002.
 Discussion!
46
Types of Mortgage Loans in China
 Commercial mortgage loans;
 HPFs mortgage loans;
 And hybrid mortgage loans, will use both HPFs
and a commercial bank’s consumer credit funds as
sources of financing.
 The LTV ratio for business mortgage loans in
China will be less than 60%, compared to the
residential mortgage loans of 70%.
47
Spread of Interest Rates between
HPF loans and Commercial Loans
Item
Long-Medium Loans
3-5 years
More than 5 years
20/10/2010
07/07/2011
5.96
6.90
6.14
7.05
HPF loans
Less than 5 years
3.5
4.45
More than 5 years
4.05
4.90
48
Emergence of Secondary Mortgage Market
 Trading practice;
49
An Early Assessment of China’s Residential
mortgage Loans Performance
 What incentive for most Chinese households to apply
for mortgage loans?
 The borrowers’ motivation for prepayment and default
in China are quite different to those observed in the
US or other developed countries.
 Discussion:
 Can you provide the basic features of mortgage loans
performance in your own country? And how can you
compare the case of China with other cases?
50
Prepayment Risk
 Since all mortgage loans issued in China are ARMs
without a cap, there are no refinance-driven
prepayments reported in Chinese mortgage market. So
far the financial ‘ call option’ has virtually no value to
Chinese mortgage borrowers.
 Chinese borrowers are quite sensitive to the increasing
of mortgage rates.
 If the interest rates will be raised, will borrowers pay
back before the maturity? Why?
51
Default Risk
 The number of default cases in China is
quite small.
 There are three major reasons for default in
China
 Mortgage fraud
 Pre-sale dispute
 Deterioration of affordability
52
Mortgage Loan Performance
 Most Chinese households are reluctant to get into debt.
 The borrowers’ motivations for prepayment and
default in China are quite different to those developed
countries.
 Prepayment risk: if the interest rate will be raised,
many borrowers will choose to pay off their mortgage
loans before the maturity.
53
Pre-sale Disputes
 In China’s market, there have been increasing
reports of homebuyers refusing to pay off their
mortgages due to disputes with real estate
developers regarding the quality and delivery time
of their housing.
 These cases are mostly related to the presale of
residential properties where the developers fail to
deliver housing units meeting the presale contracts.
 Discussion!
54
6. Discussion on Housing Market
 The amount of housing market has rapidly
increased over the past decade.
 Discussion: the real effectiveness of
government policy on housing market price.
55
Sales Revenue from Commercial
Houses, billion Yuan,1998-2013
Sales Revenue
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Sales Revenue
56
Sales of Commercial Houses,
Million Sq. m
Sales of Commercial houses
1400
1200
1000
800
600
400
200
0
Sales of Commercial houses
57
Sales Revenue/GDP Ratios
Sales Revenue/GDP
16
14
12
10
8
6
4
2
0
Sales Revenue/GDP
58
Un-precedent Growth
Sales Revenue,
RMB Billion
Sales of Houses,
Million Sq.m
Sales /GDP ratio, %
1998
2004
2013
251.33
1037.57
8142.83
121.85
2.98
382.32
6.49
1305.51
14.32
59
Discussion
 How can we rightly draw lessons from this
episode of un-precedent growth of house
sales between 1998-2013?
 Will China’s households keep their strong
demand for residential properties in the
coming 15 years?
60
7. Monetary Policy and Housing
Prices
 A strong relationship between bank lending and asset
price inflation.
 Xiaoqing Eleanor Xu and Tao Chen, The Effect of
monetary Policy on Real Estate Price Growth in China,
Pacific-Basin Finance Journal, 20 (2012), 62-77.
 Yanbing Zhang, Xiuping Hua and Liang Zhao.
“Monetary policy and housing prices: a case study of
Chinese experience in 1999-2010.” Bank of Finland,
Institute for Economies in Transition. BOFIT
Discussion Papers 17/2011.
61
Investment Theory
 To enhance portfolio return and achieve
diversification, global investors have long been
seeking opportunities in emerging real estate
markets since 1990s.
 Although international stocks, bonds and private
equity have gained much more visibility,
international real estate has played a significant
role in long-term international investment.
 Real estate as a special asset for investment.
62
Bubble Price for Residential Home
 In China, residential home price in major cities is
typically more than 30 times the average household
annual income, making mortgage loans essential for
most home purchases.
 In addition, real estate development companies often
rely on bank loans to support their project
development due to large funding needs and illiquid
nature of their investments.
 A comparison to home price based on the average
household annual income.
63
The Goals of Monetary Policy
 The goals of monetary policy in China are to maintain the
stability of currency value and foster economic growth.
 Although home price is not included in the inflation
measure, healthy development of the real estate market
with stable price growth is indirectly linked to the general
goals of China’s monetary policy.
 The central bank uses the following four major tools:
interest rate policy, reserve requirements, open market
operation, and credit policy through window guidance.
64
Money Supply
 M0: currency in circulation;
 M1: M0 + demand deposits;
 M2: M1 + savings deposits and money market
deposit accounts.
 It is worth noting that China’s monetary policy
target is the growth rate of money supply, unlike
the targeting of federal funds rate in U.S.
65
Effects of Money Supply on Home Price
 The growth of money supply may affect real estate price
growth indirectly through two channels:
 First, a change in the growth of money supply will affect
the loan-making ability of commercial banks, thus
affecting the loans made to the real estate sector as well;
 Second, an increase in the growth of money supply will
affect the public’s inflationary expectation and the demand
for non-monetary assets such as real estate, thus affecting
the real estate price growth indirectly.
66
Growth Rates for M1 and M2
35
30
25
20
15
10
5
0
M1
M2
67
 From September 2008 to December 2009:
extraordinary expansionary monetary policy to
cope with the global financial crisis.
 From January 2010: tightening monetary policy to
control the real estate bubble.
 What is the next policy for the real estate market?
68
Credit Policy
 Credit policy is made by the central bank to direct financial
institutions’ credit size and structure according to
macroeconomic policy, industrial policy and regional
development policy.
 The PBC frequently revised its real estate credit policy by
changing mortgage minimum down payment for regular
first home, large first home and second home, and issued
window guidance to effectively expand or restrict the
supply of bank credit to the real estate sector.
 Liquidity for housing price growth!
69
Bank Loans, Yuan Trillion
Bank Loans
12
10
8
6
4
2
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Bank Loans
70
Interest Rate Policy
 Since the bank rates in china are still guided by the PBC,
the interest rate policy can be used as a monetary policy
tool. It includes two categories: one is to adjust benchmark
interest rates offered by the central bank, including re-loan
rate, and reserve balance rates; the other is to adjust the
benchmark interest rates on financial institutions’ deposits
and loans and set the floating range.
 The mortgage rates are generally according to the longterm benchmark bank loan rates set by the PBC. This is an
important monetary policy tool to affect the real estate
home price growth.
71
One-Year Deposit and Loan Rates
12
10
8
6
4
2
0
Deposti Rate
Loan Rate
72
Some Findings
 It is demonstrated that declining interest rates, faster
money supply growth and loosening mortgage down
payment policy tend to accelerate the subsequent home
price growth, while rising interest rates, slower money
supply growth and tightening mortgage down payment
policy tend to decelerate the subsequent home price
growth.
 Hot money flow does not have significant impact on home
price growth beyond its impact on the money supply
growth.
 Stock market return is shown to have a significantly
positive effect on the home price growth.
73
8. Conclusions
 The residential mortgage market in China is a newly
emerging sector of the capital market.
 It is evolving rapidly with the swift housing system reform
recently carried out in China. The fast growth and the
accelerating importance of the residential mortgage sector
becomes a financial engine for the booming residential
housing development and sustained economic growth in
China.
 Changes of policy have proved to be one of the critical
determinant in mortgage payment mode.
74
Questions
 Has new-liberal reform played a significant role in
China’s housing market development?
 What are the fundamentals in China’s urban
housing price growth?
 What policies have been designed to accelerate
China’s residential housing market?
 How much of the real appreciation in house prices
can be explained by market fundamentals?
75
 What are the most important factors in
determining housing prices in major cities?
 What is “structural problems” of the real estate
market?
 Many policies have been issued, these rules were
seen as tough, but did not stop house price
inflation, Why?
 What is the major factor of China’s land system in
the support of local house development?
76
 The Chinese housing market represents a
distinctive, emerging and maturing market. Is it a
good judgment?
 Can you provide the basic features of mortgage loans
performance in your own country? And how can you
compare the case of China with other cases?
 If the interest rates will be raised, will borrowers
pay back before the maturity? Why?
77
Further Readings
 Borio, C. and Lower, P. 2002. “Asset prices, financial and
monetary stability: exploring the nexus.” BIS Working
Paper No. 114. July 2002.
 Quigley, J.M. 1999. “Real estate prices and economic cycles.”
International Real Estate Review. 2(1). 1-20.
 Hofmann. B. 2001. “The determinants of private sector
credit in industrialized countries: do property prices
matter?” BIS Working Paper No. 108.
78
 Liang Q., and Cao H., 2007. “Property prices and bank
lending in China.” Journal of Asian Economics. 18.63-75.
 Iacoviello, M., 2005. “House prices, borrowing constraints,
and monetary policy in the business cycle.” American
Economic Review. 95. 739-764.
 Yanbing Zhang, Xiuping Hua and Liang Zhao. “Monetary
policy and housing prices: a case study of Chinese
experience in 1999-2010.” Bank of Finland, Institute for
Economies in Transition. BOFIT Discussion Papers 17/2011.
79
Thanks!
80