Test of 50% house price drop
By Zhang Fengming |
April 23, 2011, Saturday
|
Print Edition
Print Edition
China is proposing a worst-case scenario of a 50 percent drop in house prices in a stress test to assess the impact of property fluctuations on bank assets, sources said yesterday.
In the test, regulators will set an interest rate increase of 108 basis points, a regulatory source told Shanghai Daily.
Two other scenarios included a property price drop of 30 percent with an interest rate rise of 27 basis points and a price fall of 40 percent with interest rates up by 54 basis points.
If prices fall, buyers are left paying mortgages on properties they are unable to sell to recoup their investment, raising the risk of loan defaults. Interest rate increases mean higher credit costs, which can also lead to loan defaults.
In the previous round of stress tests in 2010, the scenarios imagined price drops of 10, 20 and 30 percent.
Liu Mingkang, chairman of the China Banking Regulatory Commission said earlier this week that banks must "strictly follow credit procedures and further step up risk controls on loans for property development."
The banking regulator was not available to comment on the test yesterday.
In the 2010 test, the commission's Shanghai bureau found that the bad loan ratio on home mortgages in the city would rise to 1.28 percent, 2.6 times more than usual, if prices fell by 10 percent.
The ratio would rise to 1.51 percent if home prices fall 20 percent and 2.08 percent if there was a 30 percent drop.
Banks in Shanghai could face combined losses of 5 billion yuan (US$767 million), or 8 percent of their pretax profits in 2009, if property prices dropped 30 percent, the local banking regulator said in June.
Home mortgage loans are still deemed the most lucrative of retail banking services as, so far, there has been no major fall in Shanghai prices.
China is trying to curb rising home prices by limiting purchases and loans to drive out speculation. In January, the State Council raised the down-payment requirement on second-home mortgages to 60 percent from 50 percent. An extra 10 percent interest rate applies to a second mortgage. The State Council also said banks must stop offering loans to third-home buyers.
In the test, regulators will set an interest rate increase of 108 basis points, a regulatory source told Shanghai Daily.
Two other scenarios included a property price drop of 30 percent with an interest rate rise of 27 basis points and a price fall of 40 percent with interest rates up by 54 basis points.
If prices fall, buyers are left paying mortgages on properties they are unable to sell to recoup their investment, raising the risk of loan defaults. Interest rate increases mean higher credit costs, which can also lead to loan defaults.
In the previous round of stress tests in 2010, the scenarios imagined price drops of 10, 20 and 30 percent.
Liu Mingkang, chairman of the China Banking Regulatory Commission said earlier this week that banks must "strictly follow credit procedures and further step up risk controls on loans for property development."
The banking regulator was not available to comment on the test yesterday.
In the 2010 test, the commission's Shanghai bureau found that the bad loan ratio on home mortgages in the city would rise to 1.28 percent, 2.6 times more than usual, if prices fell by 10 percent.
The ratio would rise to 1.51 percent if home prices fall 20 percent and 2.08 percent if there was a 30 percent drop.
Banks in Shanghai could face combined losses of 5 billion yuan (US$767 million), or 8 percent of their pretax profits in 2009, if property prices dropped 30 percent, the local banking regulator said in June.
Home mortgage loans are still deemed the most lucrative of retail banking services as, so far, there has been no major fall in Shanghai prices.
China is trying to curb rising home prices by limiting purchases and loans to drive out speculation. In January, the State Council raised the down-payment requirement on second-home mortgages to 60 percent from 50 percent. An extra 10 percent interest rate applies to a second mortgage. The State Council also said banks must stop offering loans to third-home buyers.
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