S&P Global said on Monday that banks that operate in lower-tier cities may be at danger from China’s current efforts to revitalise its flagging real estate market.

A S&P Global research states that while the measures announced earlier this month, such as lowering down payment requirements and eliminating the mortgage rate floor, are likely to temporarily boost demand for real estate, the higher leverage may also lead to a rise in mortgage defaults.

According to the research, there is an approximate 14% projected fall in property values in smaller tier-three cities between 2024 and 2025. It stated that this would force some homeowners into negative equity scenarios, in which their outstanding mortgage loads are more than the worth of their homes.

As a result, some homebuyers could abandon their houses and stop making mortgage payments, according to the report.

“The removal of the floor on mortgage rates will also give lenders less buffer to absorb potential losses when defaults do happen,” said S&P Global Ratings credit analyst Ryan Tsang.

“Banks would have to incur additional costs to pursue defaulters’ other assets to mitigate the losses in such cases,” said Tsang.

Many Chinese cities, including the top-tier Shanghai and the lower-tier Wuhan and Changsha, have reduced the interest rates on mortgage loans and down payments in reaction to the country’s “historic” measures, which were unveiled on May 17 to stabilise its housing market, which is now experiencing a crisis.

The nationwide minimum down payment requirement for first-time homeowners was reduced from 20% to 15%, and for second-time homebuyers from 30% to 25%.

(Adapted from BusinessTimes.com.sg)