Si-ming Li Centre for China Urban and Regional Studies, Hong Kong Baptist University, Kowloon, Hong Kong Zheng Yi Chongqing Planning and Design Institute Quan Hou Centre for China Urban and Regional Studies, Hong Kong Baptist University, Kowloon, Hong Kong Using Mortgage Loans to Finance Home Purchase in Urban China: A Comparative Study of Guangzhou and Shanghai China’s Urban Land and Housing in the 21 st Century HKBU, Hong Kong, December 2007

Outline Mortgage Loan Users 3. Mortgage Loan Using 4. Concluding Remarks 5. The 2005 Guangzhou / 2006 Shanghai Survey 2. Introduction 1.

 Housing and urban development are heavily dependent on the nature of the housing financing system and the availability of credit (Zhang, 2000)  From an individual's perspective, access to housing finance is of critical importance in achieving homeownership  Underpinning the rising rate of homeownership in the West are reforms in the financial market (Angel, 2000; Li and Yi, 2007)  In China, the restructuring of the housing financing system is probably more fundamental than in developed market economies (Zhang, 2000) Urban Housing Finance

Institutional change in urban housing finance (Wang, 2001; Li and Yi, 2007)  :  Sales of public housing to sitting tenants at heavily discounted prices  1994, establishment of Housing Provident Fund (HPF) nationwide  Further liberalization of the housing finance system  Post-1998 developments:  1998, to end welfare allocation of housing  Increasing reliance on the market to satisfy housing needs  From in-kind to monetary subsidy, principally given by government organisations and other non-enterprise state work units Urban Housing Finance in China

Mortgage Loans A Necessity  Rising prices render home purchase increasingly difficult, especially for people lacking subsidies or savings  Access to Mortgage finance for the first time in China is of significant importance to the household in entering homeownership and consequently building wealth through mortgage payment and home price inflation  Bringing the case of China closer to the situation in the West (McDonald, 1974; Kain and Quigley, 1972)

Mortgage Loans A Possibility  At about the same time the Chinese state has endeavoured to build a thriving and modern banking system  Strict conditions of borrowing have limited its effectiveness before the late 1990s (Zhang, 2000)  Since then, the state has entrusted the newly restructured state commercial banks to extend mortgage loans (Li and Yi, 2007)  Commercial banks compete intensively for mortgage business, since it is considered low risk loans (Shen, 2000; Yeung and Howes, 2006)

Outstanding Mortgage Debt in Shanghai  Clearly use of mortgage loans has been showing rapid increases  The graph is about Shanghai, but other cities exhibit similar trends

 Data from the People's Bank of China show that Shenzhen (30%) and Chongqing (34%) have the highest percentages of home purchase financed by mortgage loans  But the same data show that to date the majority of home purchase remain financed by personal savings and other means  Is the use of mortgage loan in China a matter of choice?  Or is it more of a result of supply restriction? Development of Mortgage Loans in China

Literature Review  Study on mortgage lending in Western countries focuses mainly on racial disparities in mortgage lending (eg., Kain and Quigley, 1972' McDonald, 1974; LaCour-Little, 1999)  Reflected in the China context is the discussion of disparities brought forward by the implementation of the HPF (Chen et al., 2006; Chang, 2006)  And its performance (Wang, 2001; Yeung and Howes, 2006; Li and Yi, 2007) 

Mortgage loans by commercial banks rarely studied. Exceptions: Deng et al (2005): relates borrower's characteristics to prepayment behaviour. Li and Yi (2007): Personal savings and parental support are the most important sources of funding for home purchase. Urban residents in China are still reluctant to borrow mortgage loan. Absence of multivariate analysis on the access and use of mortgage financed by individual families Literature Review 

Study Objectives Based on data generated by household surveys conducted in Guangzhou (2005) and Shanghai (2006-7), the present paper tries to examine:  Who are the mortgage loan users, and how would they compare with homebuyers relying on other means?  Some authors (PBC, 2005; Chang, 2006), based on the experience in the West, believe that mortgage users are the better-off groups. If this is the case then it may be argued that lender’s assessment of credit worthiness is an important factor determining mortgage access? The concerns regarding uneven access to mortgage finance in the Western literature would then apply to the Chinese case.  For those who have made use of mortgage loans, what are the factors determining the amount borrowed?

People in the Shanghai and Guangzhou samples who have bought commodity housing from 1998 onwards  Number of commodity homebuyers in the Shanghai sample: 559  Number in the Guangzhou sample: 415  The effectiveness of the HPF is quite limited. In particular, the use of HPF loans in Guangzhou is close to non-existent (Li and Yi, 2007). Thus the following analysis focuses on mortgage loans by commercial banks. Data

The Surveyed Households in Guangzhou

The Surveyed Households in Shanghai

Frequency of Mortgage Finance in the Purchase of Commodity Housing

Financing Source for Purchase of Commodity House (Guangzhou)

Financing Source for Purchase of Commodity House (Shanghai)

Composition of Financing Purchase of Commodity House

Differences between loan and non- loan users: Univariate Analysis

Average Age of Household Head

Household Income

Work-unit Types

Occupation Status

Education Attainment

Received Parents’ Contributions

Comparison between mortgage loan users and non- loan users: Summary

Multivariate Analysis: Binominal Logit Regression To see if the above findings hold after controlling for other variables Independent Variable: Use Commercial Mortgage Loan = 1, Otherwise = 0 Explanatory Variables and Results  Socio-economic and demographic variables: Age, Work unit type, Education attainment, Years of residence in the city, insignificant for both GZ and SH; Household registration (migrants more likely to use mortgage loans) significant for GZ; Occupation status (middle and high rank cadres and professionals more likely to use mortgage loans) significant for SH  Housing attributes: Tenure of last home (1=own, 0=rent), HPF account (1= yes, 0=no), insignificant for both GZ and SH

Binominal Logit Regression: Continued Most significant variables

Multivariate Analysis: Regression on the Amount Borrowed Adjusted R Square: for GZ model, for SH model Explanatory Variables and Results  Socio-economic: Age, Work unit type, Occupation status, Education attainment, Household registration, all insignificant for both models  Housing attributes: Tenure of last home, insignificant for both models

Regression on the Amount borrowed: continued Most Significant Variables

Concluding Remarks  Both similarities and differences are found regarding the use of mortgage loans in Shanghai and Guangzhou  In both cities, government or quasi-state institution employees are less likely to employ mortgage loan, whilst private sector workers are more likely to use mortgage loans  Also in both cities, mortgage loan users are those ones less likely to receive parents ’ contribution in home purchase  Shanghai loan users compared with non loan users: younger, higher income earners, with higher occupation status, and more educated. In this respect the Shanghai case is more similar to the West;  However, in Guangzhou the higher income persons are less likely to resort to mortgage finance, suggesting that in this city if possible people are reluctant to borrow.

Concluding Remarks In determining whether and how much to borrow mortgage loan:  Parental contributions reduce both the possibility of borrowing mortgage loan and the amount borrowed  Rising housing price on the other hand increases the possibility of borrowing and the amount borrowed  Suggesting that increasingly mortgage finance has become a need for entering homeownership