Foreclosures rising in China’s “entrepreneur city” Wenzhou as properties drop below mortgage values

Foreclosures rising in Wenzhou as properties drop below mortgage values

Staff Reporter

2013-09-01

Many upscale housing units in Wenzhou are reportedly half empty amid a bout of foreclosures. (Photo/Xinhua)

Foreclosures are spiking in the city of Wenzhou in east China’s Zhejiang province as shrinking property prices have turned properties into negative equity, reports the Shenzhen-based Security Times. Since hitting a peak around two years ago, property prices in Wenzhou have declined sharply, so much so that the market value of many properties has fallen below the amount of their corresponding loans, turning them into negative-value assets.As a result, many owners have opted to allow banks to repossess their former assets rather than continue to pay their mortgages.

In 2011, property prices at Wenzhou’s Lucheng Square, for example, exceeded 100,000 yuan (US$16,300) per square meter, but this price has fallen to an average of just 40,000 yuan (US$6,500), including a recent sale for just 32,800 yuan (US$5,360) per square meter. The occupancy rate at the premium location is now less than 50%, according to one tenant.

One home owner said he purchased a 120-square-meter property in 2011 for 50,000 yuan (US$8,170) per square meter. Minus the 30% deposit, the owner took out a 4.2 million yuan (US$686,000) loan. Now the market value of the property is just 20,000 yuan (US$3,270) per square meter, placing the total value at just 2.4 million yuan (US$392,000), prompting the owner to pick foreclosure over continuing to pay off the mortgage.

A local real estate planning executive said in the past, many Wenzhou property buyers relied on guarantees from insurers, many of which have collapsed as borrowers struggled to repay their mortgages. This has brought the market value down even further, the executive said.

Under current Chinese laws, however, foreclosure is not necessarily a preferable outcome for some property owners. If the sale price of the property is insufficient to cover the remaining amount on the mortgage, the court will provide the bank with a document that requires the mortgagee to pay off the shortfall if the mortgagee has the financial capacity to do so.

According to Zhou Dewen, head of the Wenzhou Small and Medium Enterprise Promotion Association, the current trend of foreclosures could destroy confidence in the local property market and lead to more bad debts, which could develop into a full-blown banking crisis.

At the end of last year, the Wenzhou banking industry, entrepreneurs and academics reportedly warned of the potential risks of the worsening situation and had called on the municipal government to come up with a strategy to mitigate risks and loosen purchasing restrictions.