(Yicai Global) June 5 -- Amid sluggish demand in China’s property market, developers in some cities are offering ‘zero down payment’ and ‘negative down payment,’ sales practices that exploit legal loopholes, to attract buyers, Yicai Global has learned.

The cities include Shenzhen, Foshan, and Huizhou in China’s southern Guangdong province, Changchun in the northeast of the country, and Chongqing in the southwest.

Compared with the previous zero down payment practice, which was more of a marketing gimmick, this time some developers are taking a risk to artificially lower the initial payment made on properties, Yicai Global found from interviews.

“If you buy a certain apartment in our project, we can offer you an actual zero or even negative downpayment,” a sales agent in southern China told a reporter from Yicai Global posing as a homebuyer.

This is done by exploiting the difference between the price filed with the local authorities and the price the customer actually pays, the agent said. With the buyer’s cooperation, the developer notifies the authorities that an apartment sold at the government-set guide price of CNY18,000 (USD2,530) per square meter, but in reality it sold at discount for about CNY14,400 per sqm.

The buyer then uses the fabricated data to apply for a mortgage, borrows more than actually needed, and uses the difference to reduce the actual downpayment.

The practice means buyers only need to pay 30 percent or less of the official minimum downpayment to seal the deal, a sales agent in Huizhou told Yicai Global.

When the property sector boomed in the past, there was no room for such market manipulation, as builders were unwilling to offer any discount against the price filed with the authorities, according to a source at another developer in southern China. The practice’s emergence reflects sluggish market demand, the person added.

Caveat Emptor

But buyers should beware. Taking advantage of the practice raises their monthly loan repayments and also means they need to pay higher service fees and property transaction taxes.

For example, a person buying an apartment an apartment that cost CNY1.8 million (USD252,820) with a 30-year loan would need to make a minimum downpayment of CNY290,000 (USD40,730) and monthly repayments of about CNY5,300 (USD748). But if the buyer slashed the downpayment to CNY54,000 using this practice, they would need to fork out more than CNY6,000 every month due to their bigger mortgage.

The various gray-area practices to lower downpayments reflect weak housing market demand, with some developers desperate for buyers, an analyst at Centaline Property in southern China told Yicai Global. 

These developers splurged on land at the peak of the speculative bubble several years ago, but after the market cooled their destocking efforts barely work, and in some smaller townships, sales are so poor that only a handful of properties change hands each month.

Fighting to survive, these developers have no other choice but to offer subsidies and cut prices, the source added.

Risky Lending

Yet this type of practice is harmful to banks and homebuyers. Actual subzero down payments create great policy risk for lenders as excessive leverage can cause financial distress to families, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance, adding that besides personal financial risk, the falsified transaction price also entails the risk of a tarnished credit record for the buyer.

The practice also reflects the fact that China’s banks are having difficulty finding lending targets, especially for property loans, which forces some bank officials to take mortgage application materials at face value, ignoring the necessary procedures to check their veracity, Dong noted. 

To stop risky lending, banks should be more vigilant when checking prices in purchase contracts, especially when the price listed on the loan application document is higher than the average property sales price in a region, Dong said. 

Regional regulators have picked up on the new practice and are stepping in. For example, Huizhou put out a notice late last month to forbid such illegal practices among developers and real estate agencies. 

Editors: Tang Shihua, Emmi Laine