Sherry Sheng permitted herself one final splurge before joining China’s swelling ranks of homeowners: a 4,000 yuan ($642) black fur jacket. “I could never afford such a luxury after I start repaying my housing loans next month,” says the Shanghai policewoman. Servicing the two mortgages on the 1.1 million yuan one-bedroom Sheng bought on the city’s western outskirts will eat up about 70 percent of her salary.
Sheng is a fang nu, or housing slave, the popular name for a generation of middle-class Chinese who will need to work a lifetime to pay off their debts. A 1,076-square-foot apartment in one of China’s most affluent cities today costs about 40 years’ annual income, according to data supplied by the government and SouFun Holdings, a company that operates a popular real estate website. “The ‘housing slaves’ term is quite reasonable because it will put a lot of burden on home buyers if housing payments are more than half their incomes,” says Liu Li-Gang, an economist at Australia & New Zealand Banking Group.
Property prices on the mainland have almost tripled since China’s leadership began a push to encourage homeownership in 1998. That’s when Premier Zhu Rongji allowed residents in state-owned housing developments in urban centers to purchase their dwellings. The idea of buying a property with borrowed money didn’t become popular until several years later, when prices in major cities began to skyrocket.
Sheng, 29, is better off than most. Her 540-square-foot apartment cost only 16 times her annual salary. To buy it, she borrowed a combined 770,000 yuan, getting a 20-year mortgage from Agricultural Bank of China and a 15-year loan from a provident fund for city workers. Her parents helped with the 30 percent down payment. Sheng’s monthly payments will add up to 4,000 yuan—exactly what she paid for her fur jacket.
In the U.S. on average slightly less than 9 percent of a borrower’s monthly disposable income goes toward mortgage payments, according to Federal Reserve data. In China the proportion is 30 percent to 50 percent, says Wu Hao, a manager at the loan brokerage division of Bacic & 5i5j Group, a Beijing realtor. The general guideline among Chinese banks is that a borrower’s monthly salary should be at least twice her monthly payment, she says; otherwise she’ll be asked to submit proof of assets (such as property, cars, or insurance) to prove her ability to service the debt. Mortgages have maturities of 5 to 30 years. The People’s Bank of China benchmark lending rate for loans longer than five years is now 6.55 percent.
Unlike the U.S., where millions of home borrowers fell behind on their payments or stopped paying their loans altogether when the economy slumped, mainland banks report no such problems. At China Construction Bank, the nation’s biggest housing lender, the bad-loan ratio on personal mortgages stood at 0.2 percent as of June 30, unchanged from the end of 2011. That may be because Chinese buyers typically make large down payments and so are less likely to risk foreclosure. In Shanghai, Beijing, and Guangzhou, down payments average 50 percent of a home’s value, according to Centaline Property Agency, China’s biggest real estate brokerage.