On the evening of April 25, RDCY Seminar Series No.111 was held in Chongyang Institute for Financial Studies at Renmin University of China (RDCY). Kuang Weida, a professor at the School of Business at Renmin University of China was invited to give a lecture on the financial risks on China’s real estate market.
Professor Kuang said that since the 19th CPC National Congress, the prevention of systematic financial risks has become one of the major tasks of Chinese government. At present, there are many kinds of financial risks that China may encountered, such as real estate risk, local debt, and government debt risk. However, from the perspective of the possibility of risks occurrence and the influence of the crisis, real estate risk is the most prone to happen and has the most direct impact. financial risks in real estate market will involve a lot of aspects of the society, especially the family sector. Data shows that the proportion of mortgages in China`s household sector has been as high as more than 60%.
In addition, Professor Kuang noted that local debt, government debt and real estate financial risks are entangled to form a cross-risk, and account for a high proportion in local GDP and fiscal revenue, which will be the hidden risks. At the same time, the high leverage ratio of the companies is usually related to the real estate, and some land and houses are used as collateral for financing. The leverage ratio has been as high as 70% or 80%, and even exceeds 100% in several small and medium-sized companies. Therefore, the central government needs to take measures to prevent the systemic financial risks, especially control the financial risks in the real estate market.
He said that housing loan risk is important because the mortgage affects bank security. In the entire financial system, bank security is the foundation. If bank crisis occurs, the financial crisis is inevitable. Therefore, we must make it clear that there will be large-scale breach of contract if housing prices fall, and If commercial banks do not have enough capital to hedge against defaults on mortgage loans, banks will face risks.
Professor Kuang noted that fluctuations in house prices will cause default risk on home loans. According to the option theory, if the house price is lower than the mortgage, the borrower will default. Besides, the loan characteristics, borrower characteristics, property characteristics, and regional characteristics also caused the default risk of mortgages. In addition to the above risks, there are also risks of early repayment, high default rate of second-hand housing in China.
The housing bubble also has a huge impact on the risk of mortgages. It is estimated that the housing prices have serious bubbles in some Chinese cities and are underestimated in some other cities. Therefore, according to the characteristics of different regions, we should take different loans and regulatory measures, he said.
Finally, Professor Kuang concluded China`s mortgage risk is mainly that the amount of mortgage loans make the banks to bear the pressure of mortgage debt, and the housing prices also have a downward trend at present. Therefore, we must attach great importance to the impact of the price fluctuations, on the one hand to prevent the mortgage risk caused by the housing prices plummeting; the other is to strengthen the bank`s ability to resist the risk of housing loans, and make sure the proportion of housing loans in the total bank loans does not exceed 25%.