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    Gazumped! Tales from China’s Housing Market

    Easy credit, rule bending fuel a property frenzy reminiscent of U.S. housing bust.

    Shen Xiaodan, 31, is the face of a new group of speculators who have turned China’s property market into a huge casino, backed by aggressive brokers and lenders who are happy to bend or even break rules to make some quick profits. 

    With nearly 2 million yuan (currently around $309,000) in paper gains over just a few months through his investment in a two-bedroom apartment, Shen has plenty to be happy about these days. Never mind that his prized new apartment is still under construction in downtown Shanghai, or that Shen has no intention of remaining the owner by the time it’s ready for occupancy this December.

    Shen’s recent credit-fueled buying frenzy has helped to drive a price surge in major cities like Shanghai and Shenzhen, bearing an uneasy resemblance to the U.S. housing crisis and subsequent subprime bust that sparked the global financial crisis of 2008.

    A former sourcing manager for Hainan Airlines, Shen was one of the legions of speculators who were quick to jump on a buying bandwagon after China began an aggressive series of interest rate cuts and other easing policies to support the flagging real estate market last year. Shen was among the first to jump at the opportunity, even though he faced stiff government controls and bank screening to complete the transaction. 

    But he quickly discovered the restrictions that technically prevented him from buying a second home in Shanghai were relatively easy to circumvent. What’s more, even when major banks used caution, other lenders were happy to play along with the game by giving him easy credit to finance nearly the entire purchase.


    Shen already owned a nice apartment next to the future Shanghai Disneyland in Pudong, a new area of Shanghai that sprung up from rice paddies in two decades and now is home to China’s top financial hub and a pioneering free-trade zone. Shen’s parents, high school teachers in his native Anhui province, bought him the property as a college graduation gift. That apartment looked like a savvy investment long before the current bubble, since apartment prices in the area have quadrupled over the decade as Shanghai Disneyland gradually came into being. 

    But his parents’ great gift quickly got in the way of their son’s ambitions. Without a Shanghai hukou, or family registration, Shen and his wife were barred by local policy from buying a second apartment in the city. Shen also realized he would face difficulties meeting the relatively stiff down payment requirements for the second apartment he hoped to purchase.

    To circumvent the first problem, Shen sold his share of the Pudong apartment to his parents, even though no money ever actually changed hands. That qualified him as an eligible homebuyer. He said the move was lawful and saved him from the trouble of forging a new identity or falsifying a divorce, steps that have helped many street-smart investors get around the rules. 

    Unlike more aggressive types of speculators who don’t invest any of their own money, Shen and his wife put up 1.5 million yuan for a down payment. But they had no way to finance their mortgage since the purchase had drained all their savings. That’s when Shen discovered that mortgage brokers and property agents were more than happy to help him find the necessary funds from their partner lenders. Meanwhile, banks promised to grant Shen bridge loans without the need to provide collateral, so long as Shen’s mortgage loan also came from the banks. 

    With brokers collecting and often fabricating the necessary documents, Shen filed applications to about a dozen local banks, and set up interviews with three. All agreed to finance his plan, and Shen ultimately walked away with 900,000 yuan in credit lines that he planned to use to service his mortgage for the next year or two. Otherwise, he says, he could never have afforded the 25,000 yuan monthly mortgage payments given his earning power — when he was a sourcing manager, his maximum monthly salary was around 25,000 yuan. 

    Shen recalled his amusement the moment when a manager at one of the three banks, Minsheng, interviewed him in an office equipped with a surveillance camera. “I barely started to consult him on whether credit loans are allowable to service a mortgage, and the manager said, ‘What are you talking about?’” The bank clerk then raised his hand in such a way as to block the closed-circuit television that was recording their every move, said Shen. The bank clerk quickly changed the topic. 

    A spokeswoman for Minsheng in Shanghai said the bank keeps a close eye on money flow from clients’ bank accounts, and will take legal action if customers commit credit loans to property investments. “So far, we haven’t logged any misuse of credit loans,” the spokeswoman told Sixth Tone. 

    Heavy hand

    Shen’s case shows how hundreds of thousands of young profit-chasing Chinese are pouncing on loopholes to create a major new bubble in China’s already overinflated residential market, leading to huge price hikes in top cities like Beijing, Shanghai, Guangzhou and Shenzhen over the last year. 

    Central and local governments are clearly worried about the trend, prompting a new set of rules to fight speculators that took effect in March of this year. 

    In Shanghai, for example, local households used to be allowed to buy two properties with mortgages, but this is no longer the case  even if they have paid off their mortgages. Buyers of second apartments with 140 square meters or more of floor space have to provide a 70 percent down payment, compared with 50 percent for smaller apartments and 30 percent for first time buyers.

    New regulations in the city have also raised the bar significantly regarding who can qualify to buy property: Buyers have to show that they have paid taxes or social insurance in the city for a minimum of five years, up from two years previously. There has also been a significant tightening of down payment requirements. This is bad news for those who are relative newcomers to Shanghai, especially for those who had sold their homes before the rule changes were introduced and suddenly found themselves not eligible anymore. 

    The new rules follow a period characterized by looser controls. In April 2014, China began to worry about a downturn due to oversupply after years of new building and price rises. In one major easing, the compulsory down payment for second apartments shrank to 40 percent. The market got an even larger boost when China’s central bank lowered interest rates five times between March and October of 2015, concurrently lowering bank deposit reserve ratios to free up more money for mortgage lending. 

    The combined moves were equal in value to the massive 4 trillion yuan stimulus package China introduced in 2009 after the U.S. subprime crisis that dragged the world into recession, said Zhang Dawei, head analyst of Centaline Property Agency.

    A report by the 21st Century Business Herald said that, based on China's central bank information, credit eased tremendously in January 2016, with monthly supply exceeding a quarter of the annual total in 2009. In the home mortgage category, that figure was 28.1 percent.

    Policymakers hoped the easier credit would rejuvenate property markets in smaller cities, where debt-laden local governments are dependent on land sales to finance their local budgets. In Shenyang, the largest industrial town in China's northeast, land sales plummeted 50 percent year-on-year to 11.57 billion yuan in 2015, leading to a major shortfall in revenue needed to cover local expenses. 

    In addition, a residential market survey from the China Academy of Social Sciences estimates that as of 2015, nearly 4 billion square meters of residential space was either sitting idle or under construction, posing a swelling of inventory. 

    The substantial easing of policies has worked nationwide, and the income from business tax on property transactions shot up 20.2 percent for the first two months of 2016, pumping much desired revenues to local coffers. 

    It transpired that such efforts worked more in favor of speculators in big cities like Shanghai, whose property markets have been more stable and were in less need of relief. 

    The result was a sharp acceleration of property prices at the start of this year that surprised even the most bullish market players. Spiking prices sent panicked investors throughout China flocking to big cities in an unprecedented scramble to secure a home, driving up prices further still. In its regular sample of 70 major Chinese cities, the State Statistics Bureau said Shanghai property prices soared 20.4 percent in the year ending March, while those in the southern boomtown of Shenzhen surged a staggering 57.2 percent. At least half of the sample cities didn’t see as much of a boom as their coastal peers, suggesting that the latest property buying frenzy is clearly just confined to a few major first-tier cities, and has largely left the rest of China behind.

    With a total transaction volume of more than 1.4 trillion yuan, Shanghai was already the largest property market in the world last year. That trend has continued into the current year and even accelerated. In the latest of a non-stop series of new peaks, buyers in late February snapped up 3.6 billion yuan worth of apartments on the first day they were offered for sale in the Hongkou District of the city, even as prices exceeded 10 million yuan for individual apartments.

    Property consultancy firm Knight Frank LLP said in a report issued in March based on prime residential prices from December that $1 million can buy 46 square meters in Shanghai, ranking it eighth in the world — Monaco, Hong Kong, and London took the top three spots.    

    Gazumping games

    The frenzied buying has given rise to a phenomenon called “gazumping,” which occurs when an owner breaks his contract to sell to one buyer after receiving a better offer. 

    The practice has become so rampant in the first few months of the year that it has occurred in one out of every three orders at the property outlet run by Yuan Lifeng, a manager for, one of China’s top online property agents. “In my entire career, that’s unprecedented,” he said. 

    In one case that reflects the broader situation, an apartment Yuan was selling got caught up in the gazumping game and saw its price leap from an original 3 million yuan to 4 million yuan just two weeks later. 

    In Shanghai, a collective 4.4 million square meters of apartment floor space changed hands in the first quarter of this year, following 15 million square meters traded in 2015. Both figures represent big increases over a yearly average of 10 million square meters of residential property sold in each of the five years before that. 

    Such growth couldn't happen without a lavish supply of credit. In Shanghai, the outstanding aggregate of mortgage loans increased by 55.6 billion yuan in February and March alone, which was more than triple the amount in the same 2014 period. 

    “Two years ago, one apartment unit garnering 10 million yuan would be considered on the luxury end. But from this year, this price is more reflective of what ordinary investors might pay,” said Lu Qilin, head of research at Beijing-based Lianjia Real Estate Agency. 

    Lianjia itself has become a lightning rod for controversy, helping to fuel the current buying frenzy. The company, the largest real estate agent in China, was at the center of a recent scandal when it was reprimanded by the Shanghai government for helping buyers to secure loans for down payments to fuel property buying.

    Lianjia has spent 600 million yuan on a massive database since 2010, and has dominated the real estate agency business in Beijing, with detailed information on 80 percent of apartments for sale in the Chinese capital. In Shanghai and other cities, its market share soared following a series of mergers with local real estate companies. 

    For Lianjia, such lending moved deals, recruited more investors and generated returns on the massive pool of guarantee deposits from its clients. Owing to its dominant market position, Lianjia talked clients into exclusive brokerage deals, allowing the company to hike prices and eat the inflated margin. 

    A recent investigation by the housing authority in Shanghai accused Lianjia of misleading potential buyers and charging extortionate interest rates on loans even though the company isn’t licensed to deal in lending. 

    Lianjia was ordered to scrap overnight all the financial instruments from its outlets and website, particularly the notorious down payment loans that charged an interest rate of 19.2 percent, quadruple the regular rate of standard bank loans. 

    A spokesman for Lianjia described demand for bridging loans as “solid” among some new home buyers. Lianjia was doing its bit to meet such funding needs, the spokesman added.     

    Additional reporting by Dong Heng. 

    (Header image: High-rise residential properties are seen behind a statue, in Shanghai, March 2, 2013. Shen Jingwei/VCG)